JPMorgan Rates DP World at Buy Before Upgrade: Islamic Finance
JPMorgan Chase & Co. says investors should buy record-low yielding sukuk from Dubai-based port operator DP World Ltd. (DPW) and Jebel Ali Free Zone Authority FZE before credit ratings improve.
The yield on DP World’s $1.5 billion Islamic bonds due July 2017 slid 61 basis points this year to 2.6 percent at 2:22 p.m. in Dubai, the lowest level since they were sold in 2007. The yield on Jafza’s sukuk maturing two years later fell 32 basis points. Moody’s Investors Service and Fitch Ratings, which rate DP World the lowest investment grade and business-park operator Jafza junk, could raise both in 2014, JPMorgan said in a note Feb. 18.
Dubai issuers are benefiting from an economic resurgence in the Gulf business hub that’s boosting balance sheets, driving funding costs lower and helping companies pay debt early. Emaar Properties PJSC’s Islamic bond yields fell the most in more than four months after the emirate’s biggest developer was raised by Standard & Poor’s Feb. 5.
“We continue seeing tangible credit momentum in Dubai” almost without exception, Zafar Nazim, a credit analyst at JPMorgan Securities Ltd., said by phone Feb. 20. Companies are paying off debt backed by “strong cash flows,” he said.
DP World lowered its net leverage by more than half since its last upgrade three years ago, according to JPMorgan. At the same time it invested in projects including London Gateway, a new deep-sea port in the U.K. Jafza was raised to two steps below investment grade by Moody’s in October after making progress in reducing debt.
“Jafza may not get to investment grade but they’re on course for an upgrade with Moody’s given their deleveraging trajectory,” Nazim said. “DP World was last upgraded in 2011 using 2010 numbers. Back in 2010 the world was still going through a tight spot.”
Moody’s said yesterday it doesn’t comment on speculation regarding future rating actions.
Sukuk were among securities caught up in a developing markets selloff last year when the U.S. said it would reduce its $85 billion per-month bond-purchasing program. The yield on Jafza’s debt climbed to as high as 5.84 percent June 26, while that on DP World’s notes rose to 4.9 percent a day earlier.
There are three main risks for the bonds, according to Richard Segal, London-based head of international credit strategy at Jeffries International Ltd.
Yields could rise if “the U.S. Treasury (USGG10YR) market sells off sharply again” or if “risk perceptions elsewhere in emerging markets settle down and flight to quality flows reverse,” he said by e-mail Feb. 20. Segal sees a third risk if “investors begin to consider the possibility of another bubble in the United Arab Emirates,” he said.
Still, many feel equities are more expensive than fixed income, so this is less of a near-term risk, Segal said.
Growing liquidity is another factor acting in DP World and Jafza’s favor, Nazim said, as investors seek a place to put their money. Sukuk sales from Dubai slowed this year, with $300 million raised compared with $750 million in the year-earlier period.
Islamic bond sales in the emirate are expected to increase as Dubai invests more than $8 billion preparing to host the World Expo in 2020 and as $30 billion of debt comes due this year. The sheikhdom, one of seven that make up the U.A.E., has a stated ambition to become capital of the world’s Islamic economy within three years.
Dubai expects economic growth to average 4.6 percent, between 2012 and 2015, more than twice the pace as in the prior four years. Amid the growth, property prices and trade are soaring, helping Emaar, the operator of the world’s largest mall, to regain the investment grade rating lost in 2009.
Upgrades will ensure that “regional investors will get more comfortable,” Nazim said. “You don’t need too many to push the bonds tighter.”
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