Tabreed Bonds Show Investors Bet on Support: Islamic Finance

Islamic bonds of National Central Cooling Co., known as Tabreed, rose on speculation the provider of air conditioning services to the Dubai Metro may follow Aldar Properties PJSC in getting financial support from Abu Dhabi.

Tabreed’s floating-rate $200 million sukuk maturing in July rose 13 cents on the dollar in the past month to 88 cents yesterday, according to Exotix Ltd., an investment bank specializing in illiquid bonds. Shares of Tabreed, part-owned by Mubadala Development Co., fell to an eight-year low on Jan. 17 on concern government aid may dilute the stock.

“If Tabreed is not able to restructure, the support will be in another wave of convertibles,” Mahdi Mattar, head of research at Abu Dhabi-based CAPM Investment PJSC, an investment banking company, said in a response to e-mailed questions Jan. 18. “Investors learned from the Aldar case, that government support won’t be free.”

Aldar, 19 percent owned by government-investment arm Mubadala, agreed Jan. 13 to sell assets and convertible bonds for 19.2 billion dirhams ($5.2 billion) to Abu Dhabi. United Arab Emirates companies linked to real estate have been hurt by a 50 percent slump in Dubai property prices and a 30 percent drop in Abu Dhabi as banks tightened lending.

Tabreed is talking to banks to restructure 5 billion dirhams of debt. The company has 4.72 billion dirhams of outstanding bonds and loans, according to data compiled by Bloomberg. That includes 3.55 billion dirhams due this year. The company may reach an accord with lenders within a month, two bankers said yesterday. Mubadala may buy convertible bonds from Tabreed according to the bankers involved in the negotiations, who declined to be identified because terms are still private.

‘Critical Component’

Tabreed said in May it hadn’t made coupon payments on its 1.7 billion-dirham convertible Shariah-compliant bond after the board approved deferring payments under a recapitalization plan. Shareholders that month gave the board the right to raise as much as 4.2 billion dirhams through debt and equity.

Capital raising is a “critical component of the recapitalization program,” Tabreed said yesterday in response to Bloomberg News questions. “No final decision has been taken on the amount or type of capital to be raised.”

“Mubadala continues to support Tabreed management in its recapitalization program and we will provide an update when appropriate,” Abu Dhabi-based Mubadala said in a statement in response to e-mailed questions yesterday.

Abu Dhabi, holder of about 7 percent of the world’s oil reserves and capital of the U.A.E., plans to spend $500 billion on infrastructure and tourism by 2030 to diversify its economy and boost growth. The emirate and the country’s central bank lent neighoring Dubai $20 billion in 2009 as it struggled to repay debt of state-controlled companies, including Dubai World.

Bond Sales

Sales of Islamic bonds from borrowers in the six-nation Gulf Cooperation Council, which includes the U.A.E. and Saudi Arabia, dropped 32 percent to $4.5 billion in 2010, the lowest level since 2005. Global issuance fell 15 percent to $17.1 billion in 2010, data compiled by Bloomberg showed.

The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 was little changed at 6.16 percent today, according to data compiled by Bloomberg. The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s widened less than 1 basis point to 327, the data showed.

Shariah-compliant debt in the GCC returned 13.6 percent last year, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Global sukuk returned 12.8 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets rose 12.2 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Islamic bonds pay returns based on asset flows to comply with the religion’s ban on interest.

Stock Split

Tabreed in December got approval for a so-called reverse stock split, which took effect Dec. 12, lifting the share price above 1 dirham and enabling the company to raise new capital. The shares rose 0.6 percent to 1.64 dirhams yesterday. They closed at 1.63 dirhams Jan. 17, the lowest since October 2002.

“The government will support Tabreed because of the strategic necessity to its business,” Yazan Abdeen, Dubai-based fund manager at ING Investment Management (Dubai) Ltd., said Jan. 16. “While pain might be felt by equity holders because of dilution, bondholders seem to be a red line so far.’

Abu Dhabi’s government said Jan. 13 the acquisition of assets from Aldar is based on their importance to the emirate’s economy and doesn’t indicate a change in its policy to support state-owned companies. Support will be offered ‘‘exclusively” to Mubadala, International Petroleum Investment Co., Tourism Development & Investment Co. and Abu Dhabi National Energy Co., it said.

Ferrari Park

The emirate will pay Aldar 10.9 billion dirhams for a Ferrari theme park, roads and bridges on Yas Island and 5.5 billion dirhams for homes and land, Aldar said in a statement last week. Mubadala will buy a 2.8 billion-dirham convertible bond from Aldar.

The yield on Aldar’s 5.767 percent convertible sukuk due in November has dropped 237 basis points since the announcement to 4.75 percent, according to data compiled by Bloomberg. Tabreed’s 1.7 billion-dirham convertible bond due in May climbed to 21.5 percent of par value on Jan. 18 from 20 percent on Jan. 13, Exotix said.

“It’s reasonable to assume the company will receive support from Mubadala via a cash injection through a convertible bond” assuming Aldar’s restructuring sets a “blueprint for similar companies where Mubadala has a strategic stake,” Ahmad Alanani, Dubai-based head of Middle East fixed income sales at Exotix, said in an e-mail Jan. 18. “The proceeds will likely be used to address the firm’s short-term liquidity needs and debt obligations.”

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