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Thu 23 Sep 2010 11:01 AM

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Capital gains: a very bonding experience

Abu Dhabi bonds are heading for their best quarter in a year, with investors ready to snap up any new issue.

Capital gains: a very bonding experience
Capital gains: a very bonding experience

Abu dhabi bonds are heading for their best quarter in a year. Union Investment and LCF Edmond de Rothschild CI Ltd say investors are ready to snap up any new issue from the oil-rich Persian Gulf emirate.

The government's 6.75 percent dollar-denominated non- Islamic notes due April 2019 have returned 6.6 percent, set for the biggest quarterly gain since Sept 2009, and more than the 6 percent increase for Qatar's 5.25 percent debt maturing in January 2020, according to data compiled by Bloomberg. Dubai's sukuk, or bonds that comply with Sharia law's ban on interest, returned 6.3 percent and yielded 6.34 percent on Sept 17.

Speculation is growing that Abu Dhabi, which helped neighboring Dubai avoid a default last year with a $20bn bailout, may sell its first international securities since April 2009 as the economy expands. Demand for Abu Dhabi's debt due in 2019 has pushed yields down to 3.86 percent, or 11 basis points less than similar-rated securities from Qatar. Abu Dhabi's government met investors in Europe last week to brief them on the sheikhdom's budget and economy, two people familiar with the meetings said.

"I would definitely purchase Abu Dhabi debt if they issue in dollars or euro, both conventional or sukuk, since it is a very financially strong entity that issues very rarely," Sergey Dergachev, who helps manage $6bn of emerging-market debt in Frankfurt at Union Investment, said in an e-mail response to questions on Sept 14. "They are not over-leveraging themselves. It is still relatively and will be relatively cheap on a return-rating basis to other
AA credits."

Abu Dhabi last sold bonds in April 2009, when it raised $3bn from five-year and ten-year securities. The 2019 bonds yielded 137 basis points, or 1.37 percentage points, more than similar-maturity Treasuries on Sept 17, compared with 420 when the notes were priced. The gap reached a record low 95 basis points on April 5.

The United Arab Emirates' richest member will post economic growth of 3.7 percent this year, while Dubai's economy will shrink about 0.5 percent, the International Monetary Fund said in May. Abu Dhabi, home to around 7 percent of the world's oil reserves, plans to raise crude production by 30 percent to 3.5 million barrels a day by 2018, according to data from a yearbook entitled Oil & Gas Year Abu Dhabi 2010. The publication is based on an independent study carried out with help from Abu Dhabi's government.

Abu Dhabi is rated Aa2 by Moody's Investors Service and AA by Standard & Poor's, the third-highest investment grade rankings. The 2020 debt sold by Qatar, similarly rated by Moody's and S&P, offers a 132 basis-point rate advantage.

"There would definitely be demand for further issues from the Abu Dhabi authorities," John de Garis, chief investment officer at Guernsey-based LCF Edmond de Rothschild CI Ltd in the UK's Channel Islands, said in a Sept 16 telephone interview. "If the Abu Dhabi authorities hold a roadshow, it would suggest that a new issue is forthcoming. From our point of view, a conventional issue is more interesting."

The spread between the average yield for Islamic bonds in the UAE and the London interbank offered rate shrank 104 basis points to 507 basis points so far this quarter, according to the HSBC/NASDAQ Dubai UAE US Dollar Sukuk Index.

Sharia-compliant bonds returned 4.6 percent this quarter, while debt in developing markets gained 6.5 percent, JPMorgan Chaa & Co's EMBI Global Diversified Index shows. The gap between the yields of Dubai's sukuk and Malaysia's 3.928 percent Islamic notes due June 2015 narrowed 53 basis points to 360 this quarter, according to prices from the Royal Bank of Scotland Group Plc.
The Abu Dhabi government's meetings with investors aren't related to immediate plans to sell bonds, the two people, who declined to be identified because the details are private, said on Sept 14. Officials will meet investors in the US after the meetings in Europe, one of them said.

An official at the debt management office in Abu Dhabi didn't respond to telephone calls last week seeking comment.

Global sales of Islamic bonds fell 24 percent to $10.7bn so far this year, according to data compiled by Bloomberg.

Royal Bank of Scotland expects to manage $7bn to $10bn of Persian Gulf bond sales next quarter, Simon Penney, chief executive for the Middle East and Africa at RBS, the UK's biggest government-owned bank, said in an interview in Dubai on Sept 16. The bonds will be sold by governments, state-related companies, financial institutions and companies from "across the region, but dominated by the UAE," he said. The offerings will be from Abu Dhabi, Dubai and some of the country's other emirates, he said.

Following Abu Dhabi's bailout, state-controlled Dubai World's agreement this month with 99 percent of its creditors to restructure $24.9bn of debt reduced the risk that the company will default.

"You cannot underestimate the link between Dubai and Abu Dhabi," Ahmed Talhaoui, the head of portfolio management in Abu Dhabi at Royal Capital PJSC, which is 44 percent owned by United Gulf Bank, an investment bank in Bahrain, said in a telephone interview. "The trend is that whenever there is negative news on Dubai on the debt side, there could be a slight negative impact on Abu Dhabi."

The deepest financial crisis since the 1930s sent property prices in Abu Dhabi down more than 30 percent from their peak in mid-2008, according to Jones Lang LaSalle estimates published in February.

The emirate's 2030 economic plan targets 7 percent annual growth through 2015 and 6 percent thereafter. Mubadala Development Co, an Abu Dhabi government-backed investor, set up a unit for financial investment, the company said on its website.

The emirate forecast a second consecutive budget deficit this year, according to a government-guaranteed bond prospectus in July. Government spending will exceed revenue by AED84.9bn ($23bn), compared with a deficit of AED126.5bn in 2009, the data show.

Governments in the Persian Gulf haven't borrowed through global sukuk sales since the Dubai Department of Finance issued a $1.25bn Islamic bond in October. This year, Saudi Electricity Co, the region's largest utility, sold SAR7bn ($1.87bn) in April. Dar Al Arkan Real Estate Development Co, the biggest Saudi Arabian developer by market value, and National Bank of Abu Dhabi PJSC, the second-biggest bank in the UAE, sold Sharia-compliant debt in US dollars and Malaysian ringgit.

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