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Dubai’s government returned to the open bond market upon a growing sense that the notoriously ‘profligate’ emirate–as at least one analyst has previously criticized it in comparison to its more steady, oil-fueled sibling Abu Dhabi–can be trusted not to default on its $80bn or so of outstanding debt. On the heels of last week’s proposed Euro Medium-Term Note (EMTN) program which seeks to raise 6.5bn, divided into four billion dollars in EMTN and 2.5-bn in Islamic bond issue, or sukuk, the government on Wednesday successfully placed nearly $2 billion in new five-year Islamic bonds–divided into both a dollar and dirham tranche–the biggest sukuk sale from the Gulf region this year. Pricing was set at 375 basis points plus/minus 10 points over mid-swaps for the dollar tranche, and with the same spread over three-
month Emirates Interbank Offered Rate, or EIBOR, used for the
 dirham tranche.

Strong investor response was seen as a “clear indication” of increased confidence in Dubai, per one analyst. Moreover, the IMF’s latest projections for the region as a whole–a 5.2% increase next year due to climbing oil prices, revival of global demand and continued government spending–favor increased fervor in any form of ‘risk trade,’ including frontier sovereign debt. Such vigor will be welcomed by Dubai especially, which must refinance or repay $10.1bn worth of debt in 2010, $12.1bn in 2011, and roughly $15bn in 2012 (an amount equal to around 70% of the emirate’s estimated cumulative GDP for the same period), and which is the third largest re-export hub after Hong Kong and Singapore, making it particularly vulnerable to widespread slowdown. It is precisely its leverage that has made Dubai default swaps the sixth costliest of 39 emerging markets, per Bloomberg.

Yet is the premium sufficient? As The Economist noted this week, “until recently, investors were expecting Dubai to meet its obligations by running down its assets or rolling over its loans—not by issuing fresh liabilities to new investors.” The piece continued that some bankers expect Dubai’s true commitment to repayment to be a function of how visibly traded the debt in question is; that is to say, “it will try to postpone bilateral obligations, quietly and below the radar,” and local banks, as opposed to foreign ones, “will probably be asked to sacrifice the most.”


Euromoney reports the launch of London-based Alcantara Asset Management’s Russia and CIS Fixed Income Opportunities Fund, which will reportedly focus on relative value and long-only opportunities in the fixed income markets in Russia, Ukraine and Kazakhstan, and which will be lead by the firm’s founders, former JPMorganers Sergey Grechishkin and Andrei Taskin.  “Relative value”, a strategy which aims to take advantage of temporary mispricings between two related and often correlated securities, came to into question during the latest economic crisis, as “Black Swan” events in practice tend to exacerbate rather than minimize such pricing anamolies between assets.  However, the dual-strategy fits the current economic climate nicely, explained Grechishkin, which had trended higher for months but is on the cusp of what many feel is an imminent correction: “Our actively-managed long strategies take advantage of trending markets when associated with economic recovery, as well as market positioning. Our relative value strategies generally benefit from a high-volatility environment, when the relative mispricing between instruments is at its highest,” he said.

Interesingly enough, neither Grechishkin and Taskin seems partiuclarly bullish in the short term on the three economies driving their fund.  They express “cautiousness and scepticism about the end of the recession,” and say that “for now, we are staying away from Kazakhstan, and are sceptical about prospects for the Ukrainian economy in the longer term. We are actively managing our short-maturity positions in high-quality credits from Ukraine, the majority being foreign- or sovereign-owned, more than half of which will redeem within three months, and from Russia, where the majority of exposure is to well-performing and highly-liquid leading banks.”

There is loads of great information and commentary on the entire gamut of emerging and frontier markets over at, headed by a Facebook connection of mine, Paul Harper, whose knowledge of emerging telecoms in particular is probably second to none.

Interesting piece from MEED vis a vis Tripoli’s $54bn, 20-year commitment to develop joint ventures with multinational firms in order to transform the Gulf of Sitre–and namely the oil-rich industrial cities of Marsa el-Brega and Ras Lanuf–into energy hubs founded on oil and gas processing and distribution, as well as into a resort destination.  The two cities lack proper downstream investment, but the potential returns on FDI are enormous, gushed a source from the U.S. engineering firm Fluor Corporation, which was commissioned to oversee the project:

“Libya is virgin territory. It is coming out of a long embargo so there are great opportunities. The energy cities have these anchor investments but also provide for secondary industries, which take products from the heavy industries and produce plastics, for example. They also provide work for industrial and construction services. There is a much greater, wider and more open opportunity for investment, from oil and gas to secondary industry and services.”

As with many if not most frontier economies, one primary issue facing investors and companies alike in Libya is the country’s historical lack of ease of doing business:

“Libya has been a notoriously difficult arena for business in the past, and nearly two decades of U.S.-imposed trade embargoes between 1986 and 2004 have helped make it an unknown quantity for many international companies.”

Thus, the relative ease and quickness inwhich capital will begin to flow into Libya is largely a function of the speed and degree of regulatory reform.  Bring on the lobbyists.  In the meantime, the project’s developer–the state-controlled Economic & Social Development Fund (in lieu of the state’s energy firm, NOC), as well as the country’s development agency, the Economic Development Board, will handle coordination efforts of oil and gas, as well as promoting new tax incentives, respectively.

In upgrading Orascom Construction Industry (OCI)–Egypt’s largest listed builder and also the country’s biggest producer of nitrogen fertilizers–local investment bank CI Capital noted that the firm’s net EBITDA is largely a function of fertilizer prices, which most analysts expect to rise up to a further 40% in 2010. “We believe OCI’s 2010 fertilizer margins will be supported by a number of factors, including fertilizer price increases, the establishment of strategic alliances with global fertilizer distributors and production capacity growth,” CI’s report stated, while forecasting an increase in earnings for the company from $427.8m in 2009 to $668.9m in the coming year.

Sticking with OCI, last month Citigroup name the company as one of its twelve “long-term” emerging market plays. “The construction company enjoys many long-term qualifications. Its construction division dominates approximately 2.5% of total developments under construction in the GCC region. The division also grows at an annual rate of 25%,” the bank reported.

Investment firm Kuwait Projects Co.’s (KIPCO) seven-year, $500 million benchmark bond–which featured a fixed 8.875% rate and were priced at a spread of 608 bps above the USD mid-swap curve, fetched orders in excess of $3.3 billion this past week, signaling further maturation of the Gulf’s debt markets.   The bond was not only the first to come out of Kuwait this year, but it was also the first international bond of the year to be issued by a Gulf-based private sector firm.  KIPCO owns stakes in 50 companies and operates in 21 countries, and this past spring announced that it would “move ahead with plans to sell pension products worth up to $500 million in the Middle East over the next five years, and launch an insurance firm in Algeria [later in the year].”

Earlier this year the IMF stated that debt securities form just 3% of the Middle East and North African (MENA) capital markets–compared with an average of 42% across the rest of global capital markets.  However, the credit crisis has ironically spurred the market’s growth, as domestic banks became more risk averse and reticent to enter into the discounted syndicated loans that were viewed as a cheaper alternative to paper, and which had hitherto greased the region’s economic wheels.  Borrowers also took to the fact that debt issuances could be targeted to a wider market of buyers–such as pensions and insurance companies–than could syndicated loans, given not only their relative liquidity, but also the fact that they could be denominated in various currencies.  Per Dr. Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC), debt markets in fact are the holy grail of the region’s long-term social and economic development:

“Money has been coming in from oil but now we have matured and are looking at economic integration. We have to make that transformation and for that we have to break the link between oil and investments. The price of oil can lead to a cycle of boom and bust and that can be broken by the debt markets.”

The worry, however, centers around the viability of sustained demand.  If the “new normal” is indeed accurate, then emerging and frontier debt–both sovereign and corporate–will truly need to replace or at least coincide with more mature, developed issuance.

A recent FT piece quoted Bank of America Merrill Lynch analysts who estimate that Oman’s real economic growth rate will “continue to be relatively healthy, at 4% this year and 5.4% in 2010.”  And while down from an estimated 6.2% growth of last year, the bank concluded that “in the region this [growth] will be outdone only by the growth of gas-powered Qatar.”  Vis a vis the banking sector in particular, the article noted that “credit growth at commercial banks has slowed to 21% in June, down from a peak of 55% in 2008, but banks have continued to lend at a healthier clip than in most Gulf countries.”

Omani banking–and moreover the entire country’s economic recovery–runs through Bank Muscat–recently recommended by investment bank EFG Hermes, which cited the firm’s “commanding market share of 44% of the banking sector’s assets and 42% of the total banking sector’s deposits in Oman–almost 3x as big as its closest competitor.”  Of primary concern to the sector as a whole, however, remains the rising number of non-performing loans (NPL).  That said, Moody’s, a credit ratings agency, has given two reasons why Oman, and Bank Muscat in particular, are exceptions.  For instance, Oman’s banking sector as a whole is relatively stable, the agency noted, thanks to the country’s “relatively insular economy.”  Furthermore, Dubai Financial Group’s (DFG) recent 15% stake purchase in Bank Muscat, making it the second largest shareholder behind The Royal Court Affairs, a Sultanate of Oman’s governmental body, “is likely to contribute to the development of [the bank’s] franchise in the longer term both domestically and abroad.”

According to many analysts, global sukuk issuance may receive better pricing than other types of bonds given the relatively comfortable liquidity levels of Islamic institutions vis a vis their conventional counterparts.  For instance, the Abu Dhabi-based Tourism Development & Investment Company (TDIC), whose inaugural $1bn conventional bond tranche under a$3bn Global Medium Term Note (GMTN) Program this past summer was oversubscribed while being priced to yield 390 basis points over U.S. Treasuries, is hoping to raise close to another $1bn for general corporate purposes, per two unnamed bankers.  Among other current endeavors, TDIC is working on “spin-offs” of the Louvre and Guggenheim museums in the UAE capital.  Additionally, last month the Jeddah-based Islamic Development Bank raised $850 million through a five-year sukuk priced at par that yielded 40 basis points over five-year mid-swaps, and 77 points over five-year benchmark U.S. Treasuries respectively.  Meanwhile, ratings agencies Fitch and Standard & Poor’s both assigned an AA rating to the TDIC issue, while Moody’s assigned Aa2.  Per S&P, the sukuk market has languished in 2009, falling roughly 16%.  That said, the agency sees a “strong pipeline” of issuance in waiting.  Nevertheless, citing a tepid investor response to a four-year lockup period, HSBC recently delayed the launch of its first Sukuk-based fund.


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