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Mon 28 Nov 2011 07:25 AM

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Emirates bonds prized over Dubai’s on credit risk

World’s largest international airline seen as safer bet by investors than its owner, Dubai

Emirates bonds prized over Dubai’s on credit risk
Sheikh Ahmed bin Saeed al-Maktoum, chairman of Emirates Airline
Emirates bonds prized over Dubai’s on credit risk

Emirates,
the world’s largest international airline, is seen as a safer investment than
its owner, the government of Dubai.

The
extra yield investors demand to hold Dubai’s 6.7 percent dollar bonds due
October 2015 over Emirates 5.125 percent US currency notes maturing in June
2016 widened to 70 basis points, or 0.70 percentage point, on Nov 25, the most
since the state-owned carrier sold bonds in June, according to data compiled by
Bloomberg. As recently as Aug 4, Emirate’s yields were 22 basis points above
the sheikhdom’s rates.

Emirates
is building the world’s biggest fleet of wide-body jets and unveiled further
expansion ambitions on Nov 13 when it signed a deal with Boeing for $18bn of
planes.

Dubai
is still struggling to regain investor confidence after the collapse of Lehman
Brothers Holdings in 2008 roiled credit markets worldwide and triggered a slump
in real-estate prices. Some government-related companies are still
restructuring debt.

Emirates’
has “better transparency, identifiable hard and valuable assets and more liquidity,”
Gus Chehayeb, a Dubai-based associate director of research for Middle East and
North Africa at Exotix, said Nov 24.

Founded
in 1985, the airline has been profitable each fiscal year except in the second
year of operations, according to Emirates’ financial reports and a spokesman
who declined to be identified because of policy. Emirates had a net income of AED827m
($225m) in the six months ended Sept 30 compared with AED3.39bn a year earlier,
it said Nov 3.

“Bond
investors tend to reward issuers that produce consistent, positive cash flows,”
Nick Stadtmiller, a fixed- income analyst at Emirates NBD, the United Arab
Emirates’ biggest bank by assets, said in an email yesterday. “Emirates has a
track record of being cash-flow positive on an operating basis and generating a
profit year after year.”

The
yield on the airline’s bonds has dropped 12 basis points since the end of
September to 5.67 percent on Nov. 25. The rates on Dubai’s five-year dollar
notes has increased 14 basis points in the same period to 6.39 percent, data
compiled by Bloomberg show. Both bonds aren’t rated by Moody’s Investors Service
and Standard and Poor’s.

“The
last three months have coincided with a heightened sense of risk aversion from
investors given an escalation of exogenous risks spreading from the US and
Europe,” said Chehayeb. “Thus we have seen the spread widen between Emirates
and the Dubai government because investors perceive Emirates as a safer
credit.”

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continues on next page…

The
cost to insure Dubai’s debt from default climbed last week to the highest level
since Oct 7. Five-year credit-default swaps soared 49 basis points to 500 on
Nov 25, according to data provider CMA, which is owned by CME Group and
compiles prices quoted by dealers in the privately negotiated market.

Still,
the airline hasn’t been immune to Europe’s debt woes with the yield on its
notes gaining 53 basis points this month. Fuel costs also have affected
airlines globally and the Dubai- based carrier’s fuel bill surged $1bn in the
first half. Air France-KLM Group, Europe’s biggest airline, has predicted a full-year
operating loss as the escalating euro crisis makes it tougher to fund
investments.

Aviation
industry-wide profit will drop by more than half this year and 40 percent in
2012 as a slowing economy hurts bookings, the International Air Transport
Association predicts. The slump coincides with Emirates drive to build the
world’s largest fleet of Airbus superjumbo jets to establish Dubai as a
long-haul travel hub and win passengers from Air France-KLM and Deutsche
Lufthansa.

Emirates
is one of the biggest buyers of Airbus SAS A380 super jumbos and the Boeing
777s, as it works to accommodate passenger numbers that have surged fivefold in
a decade. It started developing an inter-continental network in 1996, when
long-range Boeing 777s and Airbus A340s allowed it to reach new cities.

The
airline has secured funding for aircraft deliveries through August 2012 and
expects its fleet to reach between 250 and 280 planes by 2020, Chairman Sheikh
Ahmed bin Saeed Al Maktoum said on Nov 15. Funding aircraft has not been an
issue so far, he said.

“We
are happy with the company and comfortable with the credit,” said Mark Watts,
head of fixed-income at the National Bank of Abu Dhabi, in a telephone
interview yesterday.

The
bank owns Emirates bonds, he said.

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