The Daily Update - Rating agencies also capable of upgrades

It hasn’t all been doom and gloom as rating agencies have continued to review long-term issuer ratings of late. A good example would be the recent upgrades in NFA 7 star rated Dubai.

A name we have recently added across our portfolios is DP World. Globally diversified, DP World is the fifth largest port operator in the world. The company, which is largely owned (80.5%) by the Government of Dubai recently received a one notch upgrade by Fitch to BBB+, and is rated Baa2 by Moody’s. Fitch highlighted that its upgrade reflected the company's ‘solid performance and stable cashflow’, adding that the Group’s flexible expansion plan should allow DP World to maintain a Fitch-adjusted leverage level below the 4.5x threshold; currently calculated at 3.9x.

The DP World 6.85% 2037 was one of the best performing holdings on our portfolios back during the ‘Dubai Crisis’. For example, we added the quasi-sovereign bond at a price of $50.25 at the end of March 2009, and sold out of the position in Mid-February 2013 above $114.50; the 6.85% coupon was an added bonus alongside the capital appreciation. Currently the bond is trading roughly 100bps wider than similarly rated bonds with a duration of 11.7 years. We therefore calculate that the bond offers an attractive expected return of 11.44% and yield of 4.90%.

Also, last week, Moody’s upgraded Dubai International Bank, or DIB’s rating by one notch, to A3; citing improved asset quality, increasing profitability and relatively low NPLs as some of the main reasons. Off the back of the stronger sentiment the bank’s 3.664% 2022 issue tightened a couple basis points.

The bond still trades roughly 70bps wider than similar bonds, we therefore calculate the bond offers an expected  return over 6%, yield of 3.10% and ~3.4 notches of credit cushion; so relatively attractive for a single A rated bond with a duration of ~4 years. The bank has remained resilient in the face of stubbornly low oil prices, and benefits from continued government support - due to its systemic importance within the Emirate’s banking system. We currently have no exposure to GCC banks, having taken a conscious strategic decision over a year ago. However, the DIB curve is one we are keeping an eye on especially as the bank’s fundamental soundness continues to improve, and bonds cheapen up to offer attractive risk-adjusted expected returns versus other holdings.

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