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PROMISING? Aldar bonds may still offer value after yield plunge
Aldar, which has developed flagship projects for Abu Dhabi such as the Yas Marina Formula 1 circuit and the world's first Ferrari theme park, has been hit hard by the property crash in the United Arab Emirates. The yield on 2014 bond is at record low after fresh government aid with some referring to the company as "Mubadala without a rating"
January 6, 2012 8:43 by Reuters
For example, the yield on Tourism Development and Investment Co’s 6.5 percent, $1 billion bond maturing 2014 was at 3.05 percent on Thursday, up from a record low of 2.35 percent hit in August. The company, tasked with bringing the Louvre and Guggenheim museums to Abu Dhabi, delayed bond issuance plans last year due to unfavourable pricing, and completion of the museums has been delayed for an undisclosed period.
The yield on A-rated Abu Dhabi National Energy Co’s 4.5 percent, $1.2 billion bond maturing 2014 is around 2.90 percent, up about 20 bps from its August lows.
Investors with a stronger risk appetite could consider Dubai’s Emaar Properties. The company’s 7.5 percent, $500 million convertible bond maturing 2015 was trading at 96.15 on Thursday, yielding about 8.4 percent. The yield on the bond has widened over 200 bps from an August low of 6.2 percent, but investors looking at Emaar, which is just over 30 percent owned by Dubai’s government, must factor in the external support level from the Dubai government. Given the less comfortable state of Dubai’s state finances compared to Abu Dhabi, and the fact that Dubai has a minority stake in Emaar, the bond is less attractive to some investors.
“Aldar certainly is more attractive on a relative value basis versus Emaar. In effect, Aldar is Mubadala without a rating,” says Thomas Christie, fixed income trader at Rasmala Investment Bank.
“And for taking on Mubadala risk via Aldar 2014, you get 330 basis points over Mubadala 2014s. That’s a big pick-up — barring a rating upgrade by a number of notches on Aldar, which would reduce the coupon.”
Ratings agencies downgraded Aldar last year, with Moody’s justifying its action on the grounds that Aldar was a private company and external government support was not guaranteed.
As a result, the coupon on Aldar’s 2014 bond — now rated B3 by Moody’s and B by Standard & Poor’s, several notches below investment grade — was increased 2 percent to 10.75 percent under the terms of the prospectus, which contains a coupon step provision if ratings fall below investment grade.