Dubai Debt: Looking For Value
Rumours are still swirling on the subject of the Dubai World (DW) restructuring, and I am not yet convinced that the time to initiate a long-term bullish position on Dubai stocks has come, in spite of the recent rally. I have heard various theories on DW, and I am inclined to the optimistic side: the government got burnt when it tested the water in November and will be keen to avoid similar turbulence, particularly as Abu Dhabi was affected nearly as badly as Dubai. The fact that the US$4bn Nakheel sukuk was paid back in full in December illustrates this, in my view.
The combination of a strong break through 1,800 and a positive restructuring announcement could get me interested in the Dubai Financial Markets General Index, but likewise, we could well see a correction in the short term. Indeed, there could be a sell-off following the DW announcement regardless of the outcome: bad news could send it tumbling lower, while a positive surprise could trigger profit taking. In general, there is still little to inspire me on the fundamental level just yet: I continue to look for a rise in bank lending or house prices as signs of promise – neither of which is as yet in evidence.
Nerves Of Steel Required
What does interest me to some degree is the Dubai International Financial Centre 2012 sukuk, which has seen its yield come down to 18.3% since spiking to over 30% on the back of the Dubai World crisis in November. Although this is a substantial contraction already, it could have further to go: I don’t think that the DIFC is going to default. True, the credibility of so-called quasi-governmental issuers has suffered severely in the wake of the DW interlude. However, the DIFC is a strategic asset of the Dubai government, and the cornerstone of its non-oil economy.
Given that interest rates remain very low (even with the recent rise, the 3-month EIBOR rate stands at 2.3%), and equities are volatile, 18% is a tempting yield. There are not many options, in any case. Apart from the historic dearth of corporate debt issues in the MENA region in general, the last few years have seen numerous proposed issues put on hold or cancelled. Those instruments that do exist are offering low yields in comparison to the DIFC. The National Bank of Abu Dhabi (NBAD) issued bonds at 178bps above swap rates last week, in an indication of recovering appetite in the region. (I acknowledge that Dubai Electricity and Water Authority (DEWA) has just deferred its US$1.5bn bond issue yet again for ‘administrative reasons’, but the latest delay is, theoretically at least, for only two weeks). Not one for the faint-hearted, perhaps, but if there is good news from DW, the DIFC instrument could rally.
Meanwhile, Bahrain issued its planned 10-year Eurobond this morning, selling US$1.25bn worth of paper at 200bps over mid-swaps. This is broadly positive: the government was able to issue more than the US$1bn it was planning, in an indication of strong market appetite. With a very low risk of default and improving macroeconomic and market outlook, the expected 5.65% coupon looks a generous one, and I would expect spreads to tighten.