Aldar's Sukuk Rebounding on Bets for Abu Dhabi Support: Islamic Finance
Aldar’s Sukuk May Rally on Abu Dhabi Support
Matilde Gattoni/Bloomberg
Aldar had its credit ratings cut by Moody’s Investors Service and Standard & Poor’s in the past month due to concern over the property market and ability to meet debt obligations.
Aldar had its credit ratings cut by Moody’s Investors Service and Standard & Poor’s in the past month due to concern over the property market and ability to meet debt obligations. Photographer: Matilde Gattoni/Bloomberg
Aldar Properties PJSC’s Islamic bonds, the worst-performing debt among Abu Dhabi-linked companies this year, are rebounding on speculation the government will support the company.
The 5.767 percent convertible Islamic notes due in November 2011 from Abu Dhabi’s biggest real-estate developer rose 1.81 cents on the dollar from a 16-month low reached on Aug. 11, cutting the yield to 9.589 percent from 11.142 percent, according to data compiled by Bloomberg. The securities probably will advance to par, according to Algebra Capital Ltd.
“I think the government will support Aldar,” Mohieddine Kronfol, a managing director at Algebra Capital, the Dubai firm that is 40 percent owned by San Mateo, California-based Franklin Resources Inc. with more than $300 million of assets under management, said in an interview on Aug. 19. The company has “enough money to last for a year-and-half, but beyond that they have to come up with a credible funding plan,” Kronfol said.
Aldar, which is 19.2 percent owned by Abu Dhabi-government backed investor Mubadala Development Co., had its credit ratings cut by Moody’s Investors Service and Standard & Poor’s in the past month due to concern over the property market and ability to meet debt obligations. Abu Dhabi, the United Arab Emirates’ richest of seven sheikhdoms, provided loans to Dubai last year to help state-related companies.
‘Tumultuous Situation’
S&P cited a “challenging” real-estate market and future earnings prospects when it lowered the rating on Aldar six levels to BB-, the third-highest junk ranking. Moody’s said about $2.27 billion of debt was affected by its decision to cut the rating to Ba3 from Ba1, saying the company’s “cash flow generation remains weak.”
“It’s a pretty tumultuous situation,” Usman Ahmed, a senior fund manager in Dubai at Emirates NBD Asset Management, which oversees $300 million of bonds at the unit of the U.A.E.’s biggest lender, said in an interview on Aug. 19. “We expect these bonds to be paid, but the path is going to be pretty rocky.”
Islamic debt is typically backed by assets or cash flow because the religion’s law bars payment of interest. Investors earn profit from the assets.
Aldar’s 5.767 percent Islamic notes maturing in 2011 have lost 1.7 percent this year, according to data compiled by Bloomberg, compared with a 7.4 percent gain on the 4.949 percent sukuk due 2014 sold by state-owned developer of hotels in Abu Dhabi Tourism Development & Investment Co. Mubadala Development’s 5.75 percent non-Islamic notes due 2014 returned 8 percent in the period.
The Islamic Development Bank, the Jeddah, Saudi Arabia- based multilateral lender, plans to sell $1 billion of Islamic notes to fund development projects in its member countries, Vice President Abdul Aziz Al Hinai said today in Kuala Lumpur.
Average Yields
The five-, seven- and 10-year sukuk, part of the IDB’s $3.5 billion medium-term note program, will be issued in the fourth quarter and listed in London and Kuala Lumpur, Al Hinai said.
The average yield on sukuk sold by Persian Gulf borrowers increased 64 basis points, or 0.64 percentage point, to 6.39 percent yesterday from a Nov. 18 low, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.
Emerging-market sukuk returned 3.8 percent this quarter, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. JP Morgan & Chase & Co.’s EMBI Global Diversified Index, which monitors debt from 46 emerging-market countries, gained 7.8 percent.
The yield on Dubai’s 6.396 percent sukuk due in November 2014 fell four basis points to 6.72 percent today, data compiled by Bloomberg show. The yield on Malaysia’s 3.928 percent Islamic note due June 2015 rose two basis points to 2.68 percent today, and is down 25 basis points so far in August, according to prices from Royal Bank of Scotland Group Plc. A basis point is 0.01 percentage point.
‘Time to Materialize’
Property prices in Abu Dhabi retreated more than 30 percent from their peak in mid-2008, according to Jones Lang LaSalle estimates published in February. Aldar posted a second-quarter loss of 475 million dirhams ($129 million) because of lower sales, its third consecutive quarterly loss.
“We will meet our obligations as and when they are due,” Aldar’s Chief Financial Officer Shafqat Malik said in a telephone interview yesterday. Officials at the Abu Dhabi government’s media office didn’t respond to telephone and e-mail messages seeking comment.
Abu Dhabi helped neighboring Dubai avoid a default in December on $4.1 billion of payments due on an Islamic bond issued by Nakheel PJSC with a $5 billion loan. 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.
JPMorgan has neutral recommendations on Aldar’s dollar sukuk due in November 2011 and local-currency floating rate Islamic securities maturing in June 2013, saying the company may struggle to refinance debt without government funding.
“We continue to believe that Aldar will receive support from the government, and expect the bonds to be repaid at maturity,” Zafar Nazim, a JPMorgan analyst in London, wrote in a research report in July. “However, any such support may take some time to materialize.”
To contact the reporter on this story: Haris Anwar in Dubai at hanwar2@bloomberg.net
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