Abu Dhabi’s Royal Capital Builds ‘Cash Cushion’ to Buy Bonds: Arab Credit

Royal Capital MENA Fixed Income Plus (ROYCMFI) Fund, the best-performing major debt fund in the Persian Gulf region, is building up “a cash cushion” to invest in upcoming bond issues.

“The pipeline is strong which will put some pressure on the bond market so we prefer to have some cash and profit from any opportunity,” said Ahmed Talhaoui, head of asset management at Abu Dhabi-based Royal Capital PJSC, the fund manager.

Bond issues from the Middle East and North Africa may beat last year’s $40 billion as borrowing requirements rise, according to Salman Al Khalifa, Deutsche Bank AG (DBK)’s regional head of markets. Dolphin Energy Ltd., the Abu Dhabi government- controlled venture transporting natural gas, hired banks to arrange investor meetings for a potential sale and Majid Al Futtaim Holding LLC, a shopping mall owner, is holding talks with investors for a planned sale.

Royal Capital’s fund has returned 5.4 percent in 2011, the best performance among six major funds from Gulf Cooperation Council countries that invest in the region, according to data compiled by Bloomberg. It compares with a 4.4 percent gain for the benchmark HSBC Nasdaq Dubai Middle East Bond Index.

Popular revolts, that toppled leaders in Egypt and Tunisia and sparked violence in Bahrain, Libya and Syria, slowed borrowing in the first half of the year. Governments and companies in the region have raised $11.6 billion from 24 securities this year, compared with $44.2 billion from 101 issues in all of 2010, according to data compiled by Bloomberg.

New issuers

International Petroleum Investment Co., an Abu Dhabi government-backed investor, is the biggest issuer of bonds in the Persian Gulf this year after selling $4.36 billion, data compiled by Bloomberg show. Dubai state-owned Emirates, the world’s biggest airline by international traffic, raised $1 billion from the June 1 sale of five-year bonds.

Likely issuers, such as Abu Dhabi and its government-backed Tourism Development & Investment Co., are seeking to take advantage of the lowest borrowing costs in seven month after yields fell to 5.03 percent on June 10, the lowest level since Nov. 11, according to the HSBC/NASDAQ Dubai Middle East Conventional US Dollar Bond Index, which tracks 105 securities. The rate soared to 5.97 percent on March 19 from 5.34 percent at the end of 2010 after Saudi troops entered Bahrain.

Arab Uprising Effect

“As the Arab Spring was taking hold, we were able to rotate into a lot of cash, and shield the portfolio from the severe sell-off that followed,” said Usman Ahmed, the Dubai- based head of fixed income at Emirates NBD Asset Management. “In late March, when things were beginning to turn and money was flowing into the Gulf and especially the U.A.E., we rotated back into Dubai, Abu Dhabi and Bahrain.”

Dubai’s credit default swaps, which had jumped to 655 basis points three days after state-owned Dubai World announced plans to restructure its debt in November 2009, tumbled to 352 on June 24, according to data provider CMA, which is owned by CME Group Inc (CME) and compiles prices quoted by dealers in the privately negotiated market. The contracts, which pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements, fell to as low as 317 on June 7.

International and regional demand for MENA debt securities has been greater than supply. Dubai government, which sold a $500 million bond this year, received $1.8 billion in bids.

Not as Good?

Second-half debt market performance “is not likely to be as good as the first because a rally has already set in,” Parth Kikani, assistant fund manager at Al Mal Capital PSC said in a phone interview.

The yield on Dubai government’s 7.75 percent, 10-year bond due October 2020 yielded 7 percent today, down from a record 8.77 percent on March 2, according to prices on Bloomberg.

“All fixed-income markets have massively outperformed the equity markets, globally and regionally, over pretty much any recent period over the past five years,” Ahmed at Royal Capital said. The Bloomberg GCC 200 Index (BGCC200), an index of the top 200 equities in the Gulf Cooperation Council region, which includes Saudi Arabia, Kuwait, and Qatar, has dropped 5 percent this year.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editor responsible for this story: Riad Hamade at rhamade@bloomberg.net

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