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DIFC Shariah Debt Two-Month Rally `Gone Too Far' in Dubai: Islamic Finance
The two-month rally in DIFC Investments LLC’s Islamic bonds is ending on concern the Dubai state-controlled developer will struggle to meet payments on more than $3 billion of debt.
The notes that comply with Shariah law dropped for a third day yesterday to 79.15 cents on the dollar after surging almost 10 percent since the end of May, according to data compiled by Bloomberg. The securities need to fall at least 4 percent to 76 cents or below before they are attractive to buy, according to Zafar Nazim, a JPMorgan Chase & Co. analyst in London.
DIFC Investments, the owner of assets in the Dubai International Financial Centre, a tax-free zone, had its credit rating cut one level by Moody’s Investors Service on July 8 and its outlook reduced to negative this week by Standard & Poor’s, which cited about $3.1 billion of debt and “uncertainties” over the company’s plans to sell $1 billion of assets.
“The rally we have seen in DIFCI sukuk and other Dubai names has gone too far,” Abdul Kadir Hussain, chief executive officer in Dubai at Mashreq Capital DIFC Ltd., which manages $2 billion of mainly Persian Gulf assets, said in an interview on Aug. 10. “The source of that sukuk repayment is going to be asset sales. So, as much as there is uncertainty in their asset- sale plan, obviously there will be concern on their sukuk repayment capability.”
DIFC Investments posted a loss in 2009 after an $842.5 million profit in 2008 as it wrote down the value of properties. Real-estate prices in Dubai, the Persian Gulf’s financial hub, retreated more than 50 percent from their peak in 2008 as the global credit crisis led to a cut in mortgage lending and pushed companies to slow expansion, according to estimates from Colliers International.
Dubai World
The company “may divest certain parts of its investment portfolio to create robust liquidity streams across the business, whilst maintaining a strong focus on improving returns,” a spokeswoman for DIFC Investments said in an e- mailed response to questions today.
Dubai’s state-owned companies are facing difficulties to repay debt after the global economic crisis froze credit markets and the emirate ran up loans of $109.3 billion, according to International Monetary Fund estimates. Dubai World, one of the emirate’s three state-owned holding companies, is seeking to alter the terms on $23.5 billion of government and bank debt.
Nakheel, Dubai Sukuk
Dubai avoided a default in December on $4.1 billion of payments due on an Islamic bond issued by Nakheel PJSC after receiving a $5 billion loan from Abu Dhabi, the United Arab Emirates’ richest of seven sheikhdoms. The central bank and two Abu Dhabi-owned banks also lent Dubai’s Financial Support Fund $15 billion in 2009 to help state-related companies.
The average yield on sukuk sold by Gulf Cooperation Council borrowers rose four basis points yesterday to 6.55 percent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It reached 8.76 percent on Dec. 11 after Dubai companies announced plans to restructure debt in November.
The average yield for emerging-market sukuk narrowed two basis points in the last two days to 5.4 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The yield has narrowed 90 points since the end of June.
Debt Coverage
The yield on the Dubai Department of Finance’s 6.396 percent sukuk maturing in November 2014 was unchanged today after falling seven basis points yesterday to 7.05 percent, according to prices from Royal Bank of Scotland Group Plc. The yield on Nakheel’s 2.75 percent $750 million Islamic notes due in January 2011 rose three basis points to 16.5 percent yesterday, and is up 100 basis points so far this quarter, according to Bloomberg bond trader prices.
Shariah-compliant bonds returned 9.4 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while debt in developing markets gained 12.2 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
DIFC Investments received a $500 million loan from the Dubai government in 2009 after getting a similar amount in the previous year. ING Groep NV of Amsterdam says the government will keep supporting the company.
A spokeswoman for the Dubai Department of Finance said today the Dubai government doesn’t disclose which entities will receive financial support.
“DIFC Investments is a very important part of the government and therefore support is expected to be there should they require it,” Nish Popat, a Hague-based senior investment manager at ING Investment Management Europe, said in an interview on Aug. 10 in Dubai.
‘Execution Risk’
New York-based JPMorgan raised the company’s sukuk due in June 2012 to “neutral” from “underweight” yesterday, saying assets are sufficient to cover its debt.
“Despite material deterioration in value over the last two years, DIFC Investments’ assets still provide significant coverage for its debt,” JPMorgan’s Nazim wrote in an e-mailed report.
The assets are valued at about $2.4 billion, and the company may raise an estimated $900 million from a potential sale of non-core assets, he said. He declined to comment further when contacted by Bloomberg.
About $15.5 billion of debt owed by Dubai and its state- owned companies comes due this year, according to the IMF.
DIFC Investments sold $1.25 billion of floating-rate Islamic bonds in June 2007, its first issue of the securities. The bonds mature in June 2012.
Moody’s reduced DIFC Investments credit rating one level last month to B3, the sixth-lowest junk ranking, citing a ”highly leveraged financial profile” and “expected heavy reliance on asset disposals in the coming 12 to 24 months.”
DIFC Investments’ plan to raise more than $1 billion from the sale of non-core assets by the end of 2011 faces “execution risk” and additional sales may be necessary, S&P said in a statement on Aug. 9.
To contact the reporter on this story: Haris Anwar in Dubai at hanwar2@bloomberg.net
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