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Fri 9 Mar 2012 10:36 AM

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Emirates Airline's bond yield falls to record low

Arab carrier seen as 'very good option' for investors who want exposure to Dubai

Emirates Airline's bond yield falls to record low

Emirates Airline’s bond yield is falling to a record low as the world’s biggest international carrier reaps the benefit of a recovery in Middle East passenger traffic and growing appetite for higher-yielding Dubai assets.

The yield on the Dubai-based company’s 5.125 percent dollar notes maturing in June 2016 dropped 75 basis points this year to 4.42 percent on Thursday, the lowest since they were sold in June.

The retreat outpaces a 27 basis-point drop in average yields on corporate bonds from the six-nation Gulf Cooperation Council to 4.96 percent March 7, the HSBC/Nasdaq Dubai GCC Conventional Corporate US Dollar Bond Index shows.

Emirates, which flies to 122 destinations from Los Angeles to Tokyo, is profiting from a rise in travellers through the GCC’s trade and finance hub. Dubai airport passenger traffic jumped 14 percent in January.

Europe’s second Greek bailout has been a further boon for the emirate, which counts Western Europe as its second-biggest export market and third-largest source of imports, data from the emirate’s statistics center show.

The airline is a “very good option” for investors who want exposure to Dubai and are still uncertain about other government-related entities, Ahmad Alanani, the Middle East director of Exotix Ltd in Dubai, said.

“Investors like Emirates because it is a very sound credit and a well-run business. The company is cash rich, well financed and enjoys unlimited support from the sovereign.”

Debt default risk for Dubai, which got a $20bn bailout from neighbouring Abu Dhabi in 2009 to help restructure its debt, have receded this year partly on pledges that the emirate’s main companies will manage to refinance debt this year without government help.

Five-year credit default swaps for the city, which is home to the world’s tallest skyscraper, are down 60 basis points this year to 385 on Wednesday, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market.

The yield on the government’s 6.7 percent debt due October 2015 slid 65 basis points in 2012 to 4.9 percent today, a seven-month low.

Emirates, with a fleet of 171 mainly Airbus and Boeing planes, signed an $18bn deal with Boeing for its 777 aircraft at November’s Dubai Air Show.

The Arab carrier, which competes with Qatar Airways and Abu Dhabi’s Etihad Airways, is also vying to win passengers globally from Air France-KLM, British Airways and Deutsche Lufthansa.

“Investors are putting their money at work and in the region, Dubai is where you have value,” Anas El Maizi, fund manager at Royal Capital in Abu Dhabi, said in response to emailed questions. “Emirates, as part of the Dubai complex and one of the big benchmark bonds, has also rallied.”

Emirates’ bonds have fallen with the increase in risk appetite since the European Central Bank awarded 529.5 billion euros ($695bn) in three-year loans to 800 European banks on February 29.

The bloc also approved a 130 billion-euro bailout for Greece and the US Federal Reserve has pledged to keep interest rates low until 2014, spurring risk appetite.

Europe was the destination of 29 percent of Dubai’s exports in the third quarter, Dubai Statistics Centre data show. Exports to Western Europe jumped 113 percent and imports advanced 10 percent that quarter from a year earlier, according to the data.

“This year the market has been driven by the ‘risk on’ trade, based on better US data, the Fed on hold until 2014, no bad news out of Greece and liquidity from the European Long-Term Refinancing Operation,” said Mark Watts, head of fixed-income at National Bank of Abu Dhabi’s asset management group, which manages AED4.1bn.

High-yielding bond funds attracted more than $1 billion for the week ended February 29, the ninth straight week of inflows, as investors, according to US-based research firm EPFR Global.

Still, the rising cost of fuel threatens to weigh on earnings of Emirates, which has said it doesn’t receive government subsidies. Oil production accounted for 2 percent of Dubai’s economic output in 2010, statistics center data show.

Emirates’ profit for the six months ended September 30 plunged 76 percent as fuel costs surged by $1 billion, the company, which maintains a no-hedging strategy, reported in November. The average price of oil jumped 19 percent last year.

“The lack of a hedging strategy against rising fuel costs” is a concern, said Exotix’s Alanani. “Emirates remains one of the few airlines not hedging against the increase in oil prices although so far it has been successful in passing these costs to its customers through fuel surcharges.”

While it is being “penalised by oil price,” Emirates - which operates 21 Airbus A380 superjumbos - is “profiting” from growth in passenger traffic, according to El Maizi. The airline said February 29 it will add a surcharge on all tickets from March 1 to compensate for the fuel price rise.

Passenger traffic with Middle Eastern airlines jumped 14.5 percent in January, the fastest rate of growth in any region, the International Air Transport Association said last month.

In its home market, Emirates is benefiting from a pickup in tourism to Dubai, which received 9.3 million tourists last year, up 10 percent from 2010, the emirate’s tourism department said March 7. Hotel revenues jumped 20 percent, the department said.

Investors have also responded favorably to statements regarding the emirate’s debt restructuring, said Royal Capital’s El Maizi. Dubai has “no intention” of seeking support from Abu Dhabi, Mohammed Al Shaibani, director general of the Dubai ruler’s court, said last month.

Better corporate earnings and dividend payments led to an 18.8 percent rally this year in Dubai’s benchmark stock index, making it the GCC’s best-performing measure.

Economic growth in the sheikhdom is set to climb to as high as 5 percent this year after growing more than 3 percent in 2011, a government official said in February.

“I think all the good news isn’t fully priced in,” El Maizi said.

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