Gulf Bonds May Return 20% as Default Risk Falls, Mashreq Says

By Haris Anwar and Arif Sharif

Jan. 18 (Bloomberg) -- Persian Gulf-based companies’ debt may rally this year, with some bonds returning as much as 20 percent, as the risk of default recedes and credit markets re-open, Mashreq Capital DIFC Ltd. said.

“The default probabilities that have been priced in are way too high,” said Abdul Kadir Hussain, chief executive officer of Mashreq Capital, a unit of the United Arab Emirates’ fourth-biggest lender. “The high-quality, high-grade bond space is by far the most attractive investment opportunity in the region.”

Investors are shunning corporate debt in the area amid the worst financial crisis since the 1930s following the collapse of the U.S. subprime-mortgage market in 2007. Lending in the Gulf states has been strangled, hurting the real-estate market, while tumbling oil prices since July have trimmed government revenue.

The largest state-owned companies in the United Arab Emirates have $20 billion of debt that falls due in 2009, according to a Merrill Lynch & Co. report published in October.

Hussain recommends buying the bonds of Abu Dhabi National Energy Co., a state-controlled power and oil producer known as Taqa, Saudi Basic Industries Corp., the world’s biggest chemicals maker by market value, and Qatar Petroleum, a state-run energy company in the world’s largest producer of liquefied natural gas.

“Loans are being repaid and deals are being refinanced, which is having a knock-on effect on valuations,” Hussain said. “On a total return basis, you’re probably talking about a 12 percent to 20 percent return on these names.”

Raising Cash

Other companies raising money include Borse Dubai Ltd., which is seeking $2.5 billion to refinance a loan. Dubai Aerospace Enterprise, a state-owned aviation manufacturing and services firm, raised an $800 million credit facility from a group of international and local lenders, the firm said today.

Credit-default swap contracts covering the debt of Taqa were last quoted at 317 basis points on Jan. 16, according to CMA Datavision prices. That compares with 475 basis points in October. A drop shows an improvement in the perception of credit quality.

“There is short-term uncertainty about the region’s ability to refinance its maturing debt, and that’s affecting high-quality debt as well,” Hussain said. “That’s the sweet spot of regional bond investing in my view, where you don’t have the super-turbo-charged 30 percent yield, but the possibility of a rebound is excellent.”

To contact the reporter on this story: Haris Anwar in Dubai on Hanwar2@bloomberg.net