Distressed Fund Sancta Readies for U.A.E. Deals on Oil Slumpby
Contractors, small businesses to offer best opportunities
Distressed levels returned to 2011 levels after 2014 rally
Distressed investment opportunities in the United Arab Emirates and the Persian Gulf will rise this year as stock markets and companies in the region buckle under the pressure of oil trading at around $30 a barrel, according to Sancta Capital Group.
"We’re expecting compelling opportunities as equity prices collapse, credit spreads continue to widen, and companies struggle to raise capital from traditional sources," said Ahmad Alanani, chief executive officer of the Houston-based firm, which invests in under-performing companies and their debt. "The region offers an uncompetitive investment landscape and assets can often be dramatically mis-priced, both in the equity and credit space."
Sancta Capital sees U.A.E.-based construction companies and small businesses offering the best distressed situations as projects are put on hold, contractors struggle to get paid and local banks seek to offload loan portfolios, Alanani said in an interview in Dubai where the company has a research office. It also expects blue-chip infrastructure firms in Africa to offer good investment opportunities, he said.
Oil’s more than 70 percent plunge since June 2014 means that some companies in the U.A.E. and neighboring countries, among the world’s biggest crude producers, are struggling to make debt repayments. Most of the region’s stock markets have slumped, while billions of dollars have been drained from the banking system. Distressed securities are the bank debt, trade claims or corporate bonds of companies or government entities that are experiencing financial or operational difficulty, default, or are bankrupt.
"After a strong rally in 2014/2015, driven mostly by speculative flows, we’ve quickly retraced to levels last seen in 2011/2012," said chief investment officer Gus Chehayeb, who co-founded Sancta Capital with Alanani in April 2014. "This correction is the result of a natural structural adjustment in a new world where low oil prices are here to stay."
Sancta Capital, which manages about $30 million of assets, invests mainly in bonds and shares listed in the U.A.E., Kuwait and Egypt. The company also invests across the capital structure in companies throughout the Middle East and Africa. Last year, the company returned 5.1 percent, net of all fees, to investors, compared with a decline of about 17 percent in the S&P Pan Arab Composite Index.
"We have increased exposure to certain consumer, healthcare, and education names where we think the valuations are becoming increasingly attractive," Chehayeb said. "There are relatively fewer sophisticated investors, less sell side coverage, and other drivers of inefficiency that often result in a market with lots of low-hanging fruit."
Several Dubai-based government entities were forced to restructure debt after property prices and asset values slumped in the Persian Gulf business hub and credit markets froze with the onset of the 2008 global credit crisis. Companies including Dubai World reached a deal with banks to delay repayments, while others such as Limitless LLC are still in discussions with creditors.
"Compared to the last crisis, the distress is felt by private companies the most as opposed to government-related entities whose balance sheets are relatively healthier this time around," Chehayeb said.