Oct. 3 (Bloomberg) -- EFG-Hermes Holding SAE is holding on to Dubai bonds to capture the Middle East’s highest yields, betting that the sell-off of the indebted emirate’s assets triggered by Europe’s debt crisis is overdone.
The yield on Dubai Holding Commercial Operations’ 4.75 percent euro bond due in January 2014 jumped 653 basis points, or 6.53 percentage points, in the quarter that ended Sept. 30 to 16.2 percent, the highest among the 106 members of the HSBC/NASDAQ Dubai Middle East Conventional US Dollar Bond Index. The rate climbed 25 basis points today. State-owned Dubai Holding LLC is in talks with creditors to restructure more than $12 billion in debt as the emirate seeks to recover from a borrowing binge that sent it to the brink of default in 2009.
“We are, we have been and we shall continue to be bullish” on Dubai’s credit, said Rawad Hakme, the Dubai-based co-manager of fixed-income at EFG-Hermes, the largest publicly traded Arab investment bank. “In this current environment of global macro uncertainty idiosyncratic risks are largely overlooked, hence the indiscriminate selling off of high-yield papers.” EFG owns Dubai Holding bonds and “likes other” debt securities such as those of Emaar Properties PJSC, he said.
Dubai will support its “strategic” investments, including those needing debt refinancing, after restructuring about $25 billion this year, Mohammed Al Shaibani, director of the Dubai ruler’s court, said in a Sept. 22 interview in Washington. The emirate’s economy, which was hurt by slumping property price as credit markets froze in 2009, has shown signs of recovering, led by logistics and tourism.
Dubai’s airport, the Middle East’s busiest, has reported a 9 percent increase in passengers in the seven months through July to 29.3 million. Dubai-owned DP World Ltd., the world’s fourth-biggest port operator, reported an 11 percent gain in container volumes in the first half helped by economic growth in the United Arab Emirates. Policy makers are keen not to repeat past mistakes, Al Shaibani said.
“Dubai’s government has proven its ability to raise funds and repay debts on time, hence, investors who believe in the Dubai story, would be seeing opportunities at current price levels,” said Parth Kikani, assistant fund manager at Al Mal Capital PSC in Dubai.
Al Shaibani’s remarks still failed to calm investors who are shunning the region’s riskier assets in favor of the bonds of energy-rich Qatar and Abu Dhabi. Dubai and its state-owned companies borrowed at least $113 billion to build homes and for buyouts, according to the International Monetary Fund.
Emaar Bond Yields
The yield on Emaar’s 7.5 percent dollar bond due in December 2015 advanced 240 basis points in the last quarter to a record 8.87 percent. It surged 37 basis points today to 9.24 percent, according to data compiled by Bloomberg. The yield on DIFC Investments LLC’s $1.25 billion Islamic bond due in June 2012 is 17.3 percent.
Dubai and its companies have at least $16 billion of debt coming due this year and another $15.2 billion in 2012, according to estimates from the Washington-based International Monetary Fund.
“Dubai and some of its entities have significant refinancing that they need to address in the coming 12 months, and the more difficult the international markets are, the more challenging the task becomes,” Mohieddine Kronfol, the Dubai- based chief investment officer of fixed Income at Franklin Templeton Investments (ME) Ltd., said in a telephone interview yesterday.
Emerging-market bond funds saw the biggest capital outflows in more than two years in the week to Sept. 21, EPFR Global data show, as Europe’s debt crisis prompted investors to exit riskier assets. The Federal Reserve said last month there are “downside risks” to the U.S. economy and the IMF cut its forecast for 2011 global growth to 4 percent from 4.3 percent.
Dubai’s default risk jumped 168 basis points in the past quarter to 508, near the highest level since March 2010, according to data provider CMA. The contracts advanced 8 basis points today. Qatar’s credit default swaps rose 25 basis points in the quarter to 124, two basis points lower than Abu Dhabi, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Abu Dhabi, holder of 7 percent of the world’s proven oil reserves, and Qatar, the world’s biggest liquefied natural gas exporter, are rated AA at Standard & Poor’s, the third-highest investment grade. Dubai isn’t rated.
Dubai, the second-biggest emirate in the U.A.E., raised $500 million from the sale of a 10-year bond in June. The yield on the 5.59 percent note, surged 63 basis points in the past quarter to 6.25 percent. The yield rose 5 basis points today, according to data compiled by Bloomberg.
“We are marginally overweight Dubai Inc. names in our fund and our strategy is to trade the Dubai sovereign and government- related enterprises, actively taking into consideration the risk-reward ratio,” Kikani of Al Mal Capital said.
--With assistance from Dana El Baltaji and Claudia Maedler in Dubai. Editor: Riad Hamade.
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