Last week, GlobalCapital reported on investor misgivings that the Dubai rally might be reaching its end (see Dubai roars with sukuk but market fears rise). The supporting evidence was compelling, given the recent spate of oversubscribed high yield deals and the absolute change in levels for Dubai bonds and credit default swaps since the emerging market sell-off in May last year.
There are clouds on the horizon, some investors argued – such as the Dubai World $4.4bn debt maturity next year – and a “gnawing sense of exuberance”.
But fast forward a week and anyone who left the queues or bet against the Dubai shopathon will be feeling sore, with Dubai bonds generally still holding their own. And who better to encourage more long term paper buying frenzy than the emirate’s biggest shopping mall operator MAF? It brought another one-day drive-by on Tuesday and another tight pricing, at 195bp over mid-swaps, 17.5bp inside initial guidance. Abu Dhabi National Energy Co (Taqa) at 115bp over mid-swaps for $750m looks punchy as well.
Nervous the longs may be, but they are holding tight and still stocking up. And if the credits and prices look right then who could blame them?
Yes Dubai five year CDS is trading 30bp inside its pre-May 2013 sell off level at 170bp. But as Nigel Denison, head of markets at Bank of London and the Middle East has pointed out, the continuing geopolitical turmoil caused by Russia and Ukraine has resulted in a flight to safety which has led to US Treasuries rallying and emerging market investors having to adjust geographic exposures of their asset allocation accordingly.
Dubai credit has tracked US Treasuries higher and credit spreads have also tightened due to idiosyncratic factors. A case in point is the recent roll over of Dubai’s debt to the UAE central bank ($10bn) and Abu Dhabi ($10bn) at 1%, which reflects Abu Dhabi’s overwhelming support for Dubai.
Bearing that in mind, if investors compare CDS spread differentials between Abu Dhabi and Dubai with that of Abu Dhabi and its government related entities, Dubai CDS still looks wide.
Sukuk and Middle East bond demand is – and has been for some time – stronger than supply. And while bank funding remains cheap in the region, issuers prefer to tap the loan market instead of bonds and sukuk.
The stark lack of sukuk supply has resulted in its spreads generally being tighter than that of conventional equivalents. With the US entering a rising rate environment and the Fed continuing to taper quantitative easing, the issuers which need to tap the market will do so by the end of the year to lock in low rates.
Forget year end though. Borrowers have suddenly remembered that Ramadan is around the corner and the last thing a buying frenzy needs is time for reflection. More deals look to be on the way and it will be a brave investor that leaves the race early.