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Investor appetite for Dubai credits compresses yields for MAF sukuk

Conglomerate stands to benefit from growth in emirate’s trade, tourism and service industries

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Mirdif City Centre is owned and operated by the Majid Al Futtaim group.
Gulf News

Dubai: The Islamic bonds of Majid Al Futtaim (MAF) Holding LLC, a Dubai-based family-run operator of malls and hotels, rose to the highest since their debut, buoyed by a rebound in Dubai’s tourism and real estate markets.

The yield on the 5.85 per cent sukuk due February 2017 fell 174 basis points since they were sold on January 31 to 4.1 per cent today. Average yields on sukuk from the six-nation Gulf Cooperation Council (GCC) dropped 106 basis points in the period to 3.23 per cent on Friday, the HSBC/Nasdaq Dubai GCC US Dollar Sukuk Index shows. MAF is rated the second-lowest investment grade at Standard & Poor’s, while Dubai’s debt isn’t ranked.

“Simply put, Majid Al Futtaim stands to benefit from a recovery in Dubai’s trade, tourism and services sectors, as well as renewed faith in the emirate’s real estate outlook,” Malek Khodr Temsah, vice president of treasury and investment at Al Baraka Banking Group BSC in Manama, Bahrain, said yesterday. “The entire Dubai credit universe continues to rally.”

Airport passenger traffic rose 14 per cent to a record 27.9 million in the first six months of 2012, the operator said in an emailed statement on July 30. Economic growth in the emirate, which relies on hospitality and trade for more than 33 per cent of gross domestic product, is forecast to expand as much as 5 per cent this year, according to the government.

“Our food retail business, operated by MAF Retail, will keep rolling out the opening of new stores,” Daniele Vecchi, the company’s senior vice president head of treasury, said in an email response to questions on August 2. “We are completing Beirut City Centre and we have other investment plans that will further strengthen the portfolio.”

Housing market stabilises

Dubai’s restaurant and hotels industry grew 15 per cent last year, the fastest pace since at least 2007, while wholesale and retail businesses expanded 5.8 per cent, Dubai Statistics Centre data show. In addition, the UAE’s housing market is stabilising after a boom led by speculators collapsed in 2008.

Majid Al Futtaim, which posted an 18 per cent increase in 2011 profit, also benefited from appetite for Dubai’s riskier assets after the emirate and its related entities met financial obligations.

“We still see some value in the name,” Akbar Khan, director of asset management at Al Rayan Investment in Doha, said by email yesterday. “Dubai credits have rallied as the market steadily removes the Dubai specific risk premium.”

The yield on Dubai’s 6.396 per cent sukuk due November 2014 fell 234 basis points so far this year to 3.23 per cent today. The rate had retreated to a record 3.23 per cent on July 17. The premium investors demand to hold the debt over Malaysia’s 3.928 per cent Islamic bonds due June 2015 shrank 139 basis points, or 1.39 percentage points, this year to 148, according to data compiled by Bloomberg. Malaysia is home to the world’s biggest Islamic bond market.

Still, Dubai’s companies, including MAF, are vulnerable to a worsening in Europe’s debt crisis and a slowdown in US growth.

The US Federal Reserve said last week it “will provide additional accommodation as needed” to spur growth and left unchanged its statement that economic conditions would likely warrant holding the benchmark Fed funds rate near zero “at least through late 2014.” European Central Bank President Mario Draghi signalled the bank will join forces with governments to buy sovereign bonds in sufficient quantities to ease the region’s credit crisis.

Blow-up in global economy

“The yields will remain low as long as there is not a lot of supply and obviously as long as there is not a major blow-up in the global economy which affects oil prices because that obviously will have an effect on the market here,” Abdul Qader Hussain, chief executive officer of Mashreq Capital DIFC Ltd., said by phone yesterday.

Majid Al Futtaim raised $500 million (Dh1.8 billion) from the sale of non-Islamic bonds in June after receiving bids for $3 billion, a banker familiar with the transaction said in June. Emaar Properties PJSC, the developer of the world’s tallest skyscraper in Dubai, received orders of $4.65 billion last month when it sold $500 million of Sharia-compliant notes.

The appetite to invest in sukuk has been growing “because Islamic banks are very liquid,” Mashreq’s Hussain said. “They have a lot of assets, a lot of cash that they need to invest.”

Sukuk money

With Dubai’s “major debt hurdles successfully navigated and with an abundance of sukuk money looking for a shelter given recent debt repayments, investor appetite for Dubai’s higher-beta credits remains strong and this is translating into compressing yields on MAF’s sukuk,” Temsah said.

Majid Al Futtaim has set up a $1 billion Islamic bond programme and a $2 billion medium-term, non-Sharia compliant note programme. The owner of stores in Iran, Egypt, Syria, and Lebanon said January 23 revenue rose 10 per cent to Dh18.7 billion in 2011. The company expects retail sales to rise between 15 per cent and 20 per cent this year as more visitors shop in Dubai, CEO Peter Walichnowski said in April.

“Majid Al Futtaim is obviously the only private sector sukuk in the region,” Hussain said. “It does have a pretty good story in terms of its business profile. It runs a very successful business, and a strategy that has proven to be successful.”