Barclays Capital has cherry-picked Dubai corporate credit as the most promising in the region.
The UK-based bank believes the region overall should benefit from global central banks' action which is fuelling liquidity apart from the region's own fundamentals.
While Abu Dhabi and Qatar corporations have strong fundamentals, backed by massive government reserves, there is little headroom for growth there.
"In the high-quality sovereign sector (Qatar, Abu Dhabi) and quasi-sovereign sectors, we think that room for further spread compression is limited and that absolute spread levels make the risk/reward profile tilted to the downside," said Aziz Sunderji, analyst at Barclays Capital.
Still, the bank argues that Gulf credit should be an important component of any investor's emerging market portfolio, for two good reasons:
First, the scarcity of Gulf bonds should help its valuations. GCC corporations share of emerging market bond issues have fallen from 18% in 2006 to a mere 9% today.
And lessons from a flood of Asian and South American corporate bonds, and their subsequent underperformance highlights the dangers of too much of a good a thing.
"The GCC region is not entirely immune to this (Qatar for example is likely to continue to be a heavy issuer and this helps underpin our underweight recommendation there), but this threat is generally less apparent in GCC than other regions; supply remains relatively scarce," said Mr. Sunderji.
Secondly, Gulf corporate credit is less sensitive to U.S. Treasuries than bonds of other regions.
"In other words, GCC corporate bond yields tend to absorb any move in the underlying Treasury yields," said the BarCap analyst.
"This is a detriment in a falling-rate environment, but with risk-free yield yields today at all-time lows, corporate bond investors face asymmetric risk from treasuries, with much more room for higher yields than lower yields. The inelasticity of GCC bond prices in this environment is therefore a positive: if UST yields rise, we expect GCC bonds to outperform their developed market, and many other emerging market peers too."
Within the Gulf, Dubai and Bahraini debt offer the best returns.
Dubai's USD1.25-billion two-tranche sukuk fetched an attractive price - 4.9% for a USD600-million and 6.45% for the USD650-million ten-year programme.
"This represents a lowering in financing costs compared with the June 2011 conventional bond," says EFG-Hermes. "This sukuk, and those by Dubai Inc corporates, were central in Dubai meeting it its heavy refinancing needs in 2012. Jebel Ali Free Zone raised a USD650 million sukuk to help meet a November 2012 maturity on its original Islamic bond. Dubai Holding Commercial Operations Group and DIFC Investments also refinanced by issuing sukuks in 2012."
The Egyptian bank also expects more UAE issuances for 'genuine growth' which should boost confidence among business confidence.
BAHRAIN DEBT
Bahrain also went to the market earlier in the year with USD1.5-billion despite a precarious political situation that is far from being resolved. The issue was oversubscribed by 400% and had a 10-year maturity.
Shaikh Salman bin Isa Al Khalifa, Executive Director, Banking Operations, at the Central Bank of Bahrain, said the market response to the offering was proof of the strong credit standing enjoyed by the Kingdom of Bahrain and confidence in Bahrain's financial sector.
The offering was priced at a re-offer yield of 6.143% %, reflecting a spread of 437.5 basis points over the US 10-year mid-swap rate.
Investors were spread geographically, with 29 % of the bond was placed in the Middle East, 14 % in the Kingdom of Bahrain, 16 % in the U.K.,16 % in Europe, 14 % in United States, and 11 % in Asia.
At the other end of the credit spectrum, Qatari banks have seen credit growth surge strongly and have benefited from easy access to markets.
But the country's expanding funding needs could dampen investor sentiment.
"We believe that Qatari banks' strong credit profiles, with easy access to the wholesale market and a decent amount of liquid assets, allow them to handle strong credit growth, but further funding strains (accompanied by slow customer deposits creation as in H1 12) could result in tighter cost of funds," says BarCap's Antoine Yacoub.
BARCAP'S PICKS
Barclays Capital recommends buying Dubai Electricity Water Authority (DEWA) bonds to its clients.
The bank also suggests exposure to Majid Al Futtaim debt, which it believes is the 'best value in the BBB space'. In the emirate's transportation and logistics sector, the bank recommends buying DP World debt, although the bank is not enamoured by the Emirates Airline's offering, finding it "too expensive".
Within Dubai real estate, BarCap favours Dubai Holding Commercial Operations Group over stalwart Emaar Properties.
"The two companies have very similar credit metrics: in size, business profile (in fact, we would argue Emaar has riskier business profile than DHCOG), leverage and ratings only one notch apart with Moody's. While DHCOG has some legacy issues, and most importantly does carry more refinancing risk than Emaar, we do not believe the current c.300bp differential between the Emaar 16s and DUBAIH 17s is justified. We continue to view DHCOG as the most attractive name in Dubai from a risk-return perspective."
© alifarabia.com 2012
