DP World yields at record low on rating upgrade

Rate on the $1.5bn sukuk due July 2017 fell 47 basis points or 0.47 percentage point
PORTS GIANT DP World, the world’s fourth-biggest ports operator, reported a 13 percent increase in profit to $374.8m last year as global trade rose (ITP Images)
By Bloomberg
Mon 18 Apr 2011 12:48 PM

The yield on DP World Ltd’s Islamic bond dropped to a record low after Moody’s Investors Service raised the ratings on the Dubai government-controlled ports operator to investment grade, attracting investors.

The rate on the $1.5bn sukuk due July 2017 fell 47 basis points last week, or 0.47 percentage point, to 5.78 percent on April 15. The yield on Dubai's 6.396 percent sukuk due November 2014 dropped to an all time low of 5.15 percent on April 13 and retreated 40 basis points since Dubai World, the state-owned holding company, signed a final accord last month altering the terms on about $25bn of debt, easing concern the emirate may default.

The ratings upgrade widened the pool of investors for DP World’s sukuk because some funds were limited to buying investment grade securities, according to Mashreq Capital and Rasmala Investment Bank Ltd. Confidence in Dubai’s enterprises is improving as government-related companies complete debt restructurings and economic growth accelerates.

“We wanted to buy it, but the rating agencies were slow in upgrading it,” said Zeid Ayer, who helps oversee $1.6bn of Sharia-compliant assets at Kuala Lumpur-based CIMB-Principal Islamic Asset Management Bhd, a unit of CIMB Group Holdings Bhd, the top sukuk underwriter last year. “It’s a strong business, they’ve posted good results recently and it’s a well- diversified business.”

DP World’s long-term foreign currency and local currency debt ratings, which affect $3.25bn of borrowings, were lifted one level to Baa3, the lowest investment grade, from Ba1 by Moody’s on April 11. The outlook is stable. Fitch Ratings assigned the company a long-term issuer default rating of BBB-, the lowest investment ranking, on March 23.

The ratings “are sustained by the company’s diversified global operations, the expected growth in international container traffic as well as solid profitability and a strong liquidity profile,” Franck Nowak, associate analyst at Moody’s in Dubai, wrote in the statement.

DP World had its debt rating slashed to below investment grade in December 2009 by Moody’s, which also downgraded five other companies controlled by Dubai’s government on concern the emirate won’t increase support for state-owned companies. Dubai World roiled global financial markets in November 2009 after it sought to delay repayment on its debt.

“It’s possible that you will get some Islamic money that is unable to look at non-investment grade bonds that might take a look at DP World,” Abdul Kadir Hussain, who helps oversee $2bn in fixed-income assets as chief executive officer at Mashreq Capital in Dubai, said in an email April 13. “I think the credit story is good and the bonds are still attractively priced, despite a smart move up over the last few days.”

Dubai on the brink of a debt default in 2009 received a $20bn bailout from the Abu Dhabi government and the UAE’s central bank that year. The emirate and its state-owned companies ran up debt of at least $129.3bn amid a building boom, according to estimates by Credit Suisse Group AG in January.

“Investors’ perception of Dubai, in general, is still marred by the emirate’s debts,” Datin Maznah Mahbob, Kuala Lumpur-based chief executive of Funds Management at AmInvestment Bank Group, said in an interview in Abu Dhabi on Sunday. “It affects all entities in Dubai.”

DP World’s long-term foreign issuer credit is rated BB by Standard & Poor’s, the second-highest junk grade. Dubai’s debt isn’t graded by credit rating companies. Neighbouring Abu Dhabi is rated Aa2 at Moody’s Investors Service, the third-highest investment-grade ranking.

The difference in yield between Dubai’s 6.396 percent dollar sukuk and Malaysia’s widened 14 basis points last week to 238 on April 15, according to data compiled by Bloomberg.

Offerings from the six Gulf Cooperation Council countries, including the United Arab Emirates and Saudi Arabia dropped to $964m this year from $2.3bn in the same period in 2010, according to data compiled by Bloomberg.

Average yields on Sharia-compliant notes from the GCC retreated 14 basis points last week to 4.93 percent on April 15, the lowest level since October 2005, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The extra yield investors demand to hold the debt over the London interbank offered rate was little changed in the week at 293 basis points.

Dubai’s economy, the second-biggest of seven that make up the UAE, is recovering from the credit crisis, helped by a revival in trade and tourism. Gross domestic product expanded 2.2 percent in 2010 from a year earlier, the statistics bureau said on its website March 21. Economic growth is expected to accelerate to 4 percent this year, according to Standard Chartered Plc in December.

Sukuk, or bonds that use asset returns to comply with Islam’s ban on interest, from the GCC returned 1.4 percent this month, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Debt in developing markets gained 0.6 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded ringgit-denominated government securities, was at 101.896 April 15, compared with 101.815 a week earlier. The gauge has gained less than 0.1 percent this month.

DP World, the world’s fourth-biggest ports operator, reported a 13 percent increase in profit to $374.8m last year as global trade rose.

“You will have more regional investors that are mandated to look only at investment grade paper that will now be more willing to take some on,” Louis Najem, Dubai-based fixed-income sales trader at Rasmala, said in an e-mail response on April 13.

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