Gulf bond yields, CDS spreads on the rise

Bond yields and credit default swaps (CDS), or insurance against losses on a security in the event of a default, are on the rise in the Gulf, signaling that investors believe the economic outlook will continue to deteriorate, according to a new report.

The cost of insuring Gulf debt has jumped as oil prices have tumbled from record highs in July, and signs of a steep correction in real estate prices have emerged, revealed Global Investment House's analysis on Tuesday.

Traders are especially bearish on Bahrain, where CDS spreads have widened by 174.2 basis points (bps) in the last three months, followed by Saudi Arabia (114.8 bps), Abu Dhabi (96.7 bps) and Qatar at (70 bps),

“Capital markets have been quite unforgiving in the case of Bahrain, with least oil reserves and the highest government debt in percentage of GDP terms,” the Kuwaiti investment bank said.

Corporates in the region have been hit even harder. The CDS spreads on Dubai based companies range between 600 bps and 1,100 bps, which is significantly higher than on Abu Dhabi based corporations, which range between 250 bps and 400 bps.

Global also noted that while spreads on Dubai Holding Commercial Operations Group and DP World touched their previous highs on Oct. 27, they have been rising since Dec. 30 and Nov. 5, respectively, indicating a deteriorating perception among investors.

The price of corporate bonds in Dubai has also dropped dramatically.

The yield on Nakheel’s Islamic bond (sukuk) that matures on Dec. 14 this year has soared to 41.9 percent from 27.7 percent a month ago, according to data from Bloomberg.

Ibrahim Bitar, director of capital markets at Arqaam Capital, said the Nakheel bond offered investors “tremendous” opportunity.

Global banks being forced to reduce leverage, funds liquidating their investments to face redemptions and retail investors selling all risky assets were among the macroeconomic reasons for the high yield, he said.

“The lack of transparency on Nakheel’s financial condition is making investors discount a lot of uncertainty,” he said.

The Nakheel sukuk is explicitly guaranteed by Dubai World, he added.

“Moreover, Nakheel has recently secured funding of $1.2bn through a sale of its receivables. In addition, given its strategic importance, the Dubai government is most likely to step in and assist the company in case a problem arises,” Bitar said.

“Finally and most important, the emirate of Abu Dhabi can be a lender of last resort given how wealthy the oil-rich emirate is.”