Abu Dhabi aid rewards Dubai electricity over Taqa

Dubai Electricity Water Authority bonds are generating more than twice the return compared with debt issued by Abu Dhabi National Energy Co, rewarding investors willing to bet on riskier Dubai assets.

Dollar-denominated bonds issued by the Dubai government owned utility known as DEWA and due in 2015 have returned 9.3 percent so far this year, compared with the 4.2 percent return on 2014 dollar bonds sold by Abu Dhabi National, or Taqa, the neighbouring emirate’s utility. DEWA’s credit ratings are at least four steps lower than those of Taqa, Abu Dhabi’s top power supplier.

Confidence in Dubai, commercial hub of the United Arab Emirates, has improved this year as state-run companies, including holding unit Dubai World and property developer Nakheel, complete debt-restructuring talks with
creditors.

Abu Dhabi’s $20bn bailout of Dubai during the global financial crisis has reassured investors that the country’s oil- rich capital is willing to support its neighbour.

“Investors are choosing to buy Dubai Inc credits because they’ve seen through the Dubai World and Nakheel examples that there is tangible support for Dubai from Abu Dhabi,” Chavan Bhogaita, head of the markets strategy group at National Bank of Abu Dhabi, said in a phone interview on July 4.

“Investors are cognizant of the fact that they can generate a relatively higher yield from certain strategic assets such as DEWA, knowing that there is the probability of external support should the need arise.”

DEWA’s Chief Executive Officer Saeed Mohammad Al Tayer was unavailable to comment because he is on leave, a public relations officer said Wednesday. Taqa did not immediately respond to an emailed request for comment.

Dubai and companies it owns or controls borrowed about $129bn, according to Credit Suisse Group, in an effort since 2002 to transform the emirate into a regional center of finance, logistics and tourism. Abu Dhabi provided cash for Dubai as frozen global credit markets hampered trade, cut lending and sent property prices plunging more than 60 percent, forcing Dubai World and Nakheel to restructure their debts.

DEWA, which generates and distributes power and water in Dubai, was the first government-owned entity to tap credit markets after the city’s debt crisis, in April 2010.

Dubai’s government has guaranteed some of DEWA’s liabilities because of the utility’s importance, according to the prospectus for the government’s most recent bond issue.

The emirate on June 15 sold $500m of 10-year bonds priced to yield 375 basis points, or 3.75 percentage points, above the five-year benchmark mid-swap rate — the price of swapping a fixed-rate government bond yield for a floating rate. It was the lowest interest rate paid by the government since its rescue in 2009 by Abu Dhabi.

Dubai’s dollar bonds due in 2020 have returned 17 percent this year, more than four times the average for Middle Eastern debt as measured by the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond
Index.

Credit-default swaps for the emirate surged to 655 basis points three days after Dubai World announced plans to restructure its debt in November 2009.

The number of “quasi-sovereign” Dubai companies that still need to restructure their debts over the next two to three years, together with concern the emirate may have difficulties making repayments on debt due by 2014, means “the recovery remains cautious,” according to Ahmad Alanani, the Dubai-based head of fixed-income sales for the Middle East and North Africa at Exotix, an investment bank with headquarters in London.

Dubai has about $113bn in publicly held debt and must make payments of $31.2bn this year and in 2012, according to an International Monetary Fund report published on June 16.

“The credit risk perception of Dubai has improved markedly since the successful restructuring of Dubai World,” Alanani said in an interview on July 10. “However, the recovery remains cautious, which means Dubai credits will continue to trade at a spread to Abu Dhabi.”

DEWA is rated BBB- by Standard Poor’s, the ratings company’s lowest investment grade, and Ba2 by Moody’s Investors Service, their second-highest junk rating. SP ranks Taqa’s debt four steps higher at A. Moody’s ranks it five levels higher at A3.

“Dubai’s credit story has improved considerably this year, with strengthening fundamentals and reduced uncertainty after restructuring,” Nick Stadtmiller, a fixed-income analyst at Emirates NBD PJSC, the UAE’s biggest bank by assets, said in a July 4 interview. “Abu Dhabi’s credit profile is strong but hasn’t changed much.”