The Daily Update - Abu Dhabi & Sharjah

Sovereign and quasi sovereign bonds from the GCC region remain one of our favoured areas for portfolio exposure as a good number of issues have strong credit profiles and screen attractively on our models. Plus, the GCC region is benefiting from greater investor interest and portfolio inflows due to larger index inclusion: For example, JP Morgan is including Bahrain, Kuwait, Qatar, Saudi Arabia and UAE in its Global Diversified Emerging Market Bond Index (EMBI-GD) in phases from January 31 2019.

To illustrate the continued strong demand for issues from the region, this week the Emirate of Sharjah issued an USD1bn sukuk, Sharjah 3.854% 2026, at MS+155bps with an order-book in excess of USD4.3bn. Using a best A3 rating for the Emirate of Sharjah the issue is trading ~1.7 notches cheap on our models. However, in terms of the UAE emirates, our preference lies with issuers such as the emirate of Abu Dhabi and some quasi-sovereigns where we see more attractive valuations.

Earlier this week, Moody’s affirmed the long-term issuer rating for Abu Dhabi at Aa2 with a stable outlook. They note the rating is ‘supported by Moody's expectations that the sovereign's fiscal strength will remain very high, with very low government debt and vast sovereign assets. Prospects for a medium-term increase in economic activity and revenue from the hydrocarbon sectors and reforms aimed at developing the non-oil sector also support the ratings.’

To illustrate some of the more attractive valuations for a given credit rating and maturity from Abu Dhabi based issuers: Mubadala 3.75% 2029, rated Aa2/AA/AA by Moody’s/S&P/Fitch, is a quasi-sovereign issuer whose rating is aligned with Abu Dhabi’s given it is 100% owned by the government and its public policy role given the strategic importance of the investment vehicle. Mubadala 3.75% 2029 trades at a yield of 3.68% and trades ~4.5 credit notches cheap on our models. Abu Dhabi government 3.125% 2027 also looks attractive trading on a yield of 3.18% and is ~3.1 notches cheap using an AA bond rating from S&P and Fitch.

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