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Abu Dhabi’s Invest AD Starts Middle East, Africa Bond Fund

Invest AD, an Abu Dhabi-based asset manager, said it started a Middle East and Africa bond fund today with initial capital of $25 million to tap high-growth economies where companies can’t easily get bank loans.

The bond fund, the first of its kind at Invest AD, will primarily invest in U.S. dollar-denominated debt across the region, the fund’s manager, Dilawer Farazi, said in an interview in Abu Dhabi yesterday. Forty percent of the fund will be earmarked for sovereign and quasi-sovereign bonds while 60 percent will be invested in corporate bonds, Farazi said.

“There’s a general opportunity in relative yield and in repricing in the Middle East and Africa region, where economic growth is robust, credit fundamentals are improving and actual default rates have been lower with higher recoveries than in other emerging markets,” Farazi said.

Invest AD will provide an initial $25 million for the fund, which has a minimum entry requirement of $5,000 for retail investors and $1 million for institutional investors, Farazi said. The fund is a European-regulated fund, known as Undertakings for Collective Investment in Transferable Securities, or UCITS, he said.

Bond Rally

Fixed-income returns in the Middle East have outpaced equity returns this year amid a global bond rally and as credit risk in the United Arab Emirates receded after Dubai refinanced bonds. Bonds in the United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, collectively known as the Gulf Co-operation Council, have advanced 11.9 percent this year, according to the HSBC/Nasdaq GCC US Dollar Sukuk/Bond Index, compared with a 3.1 percent gain for the Bloomberg GCC 200 Index of equities.

The default rate on bonds in the Middle East and Africa region has been less than 1 percent compared with about 2 percent for Asia and Latin America, and 4 percent in emerging Europe, Farazi said. The refinancing of Dubai bonds, including those of Dubai Holdings, Dubai International Finance Center, and Jebel Ali Free Zone Authority have “encouraged” investors, Farazi said.

Middle East and Africa bonds are undervalued relative to the underlying credit qualities of the issuers, even after they rallied along with other global bonds, Farazi said. The credit-default-swap spread on the AA-rated Abu Dhabi sovereign bond is at about 86 basis points, compared with 66 basis points for similarly rated South Korea bonds, he said.

African bond issuers have to offer high yields because of junk credit ratings, he said, citing bonds issued this year by Afren Plc, Access Bank PLC and Tizir Ltd.

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