DUBAI, April 1 (Reuters) – After a sell-off sparked by lower oil prices, bonds of Gulf companies are now offering yields comparable to junk-rated debt in other regions, potentially attracting yield-chasing investors who usually avoid the area.
Corporate issuers in the Gulf are set to face higher borrowing costs – some estimate 200 to 300 basis points higher or more – when they return to the market, after the collapse of an OPEC output agreement in March caused bond prices to tumble.
That could weigh on the balance sheets of some over-leveraged companies, but it may draw risk-on investors who chase higher returns. They have stayed away from Gulf debt because of the oil wealth of its underlying economies, which translated into lower returns.
But the potential shift in the investor base is also likely to bring into sharper focus longstanding concerns about disclosure in the region. High-yield investors normally require more transparency from companies to buy their debt.
Abdul Kadir Hussain, head of fixed income asset management at Arqaam Capital, said some corporations will offer higher yields until there is some confidence on the economic recovery.
Those could include real estate companies like DAMAC and Emaar and Emaar Malls in the United Arab Emirates, or Dar Al Arkan in Saudi Arabia, he said.
Higher yields may bring in “more of a fundamental corporate investor” to the region, Hussain said.
However, debacles like the collapse of private equity firm Abraaj and the fall from grace of NMC Health have revived concerns about corporate governance.
Abraaj filed for insolvency in 2018 in the aftermath of a dispute with its investors. NMC Health is facing debt woes after U.S.-based short-seller Muddy Waters attacked its financial statements.
“A lot of companies that have had governance issues in the past will come to the limelight now because of NMC. That’s going to hit the industry very badly,” a Dubai-based banker said.
REAL ESTATE IN FOCUS
The real estate market has been suffering in Dubai for most of the past decade because of oversupply and could suffer more due to weak oil prices and the coronavirus outbreak.
The yield on DAMAC’s bonds maturing in 2022 rose from 8.7% at end-February to 21.3% on Tuesday’s close. Emaar Mall Group’s 10-year sukuk due in 2024 rose by nearly 500 bps in the same period.
Yields on emerging-market high-yield bonds have increased from 8.5% to 13.6% in the same period, according to the Bloomberg Barclays Index, a Dubai-based fixed income strategist said.
The banker, who asked not to be named, also said real estate companies like Emaar and Abu Dhabi’s Aldar are likely to offer higher yields.
They can weather the storm because of their strong government links, but markets will still price them as real estate developers, “not as a government, quasi-support kind of franchise,” the banker said.
Junk-rated bonds are attractive to investors at times of historically low central bank rates.
Anita Yadav, partner at Aspire Capital, said companies, particularly independent ones, risked credit-rating downgrades.
“The high-yield category bonds will increase in the market,” she said.
Dino Kronfol, chief investment officer of global sukuk and MENA fixed income at Franklin Templeton, said that in the current market environment he would consider investing in bonds from the region’s companies, but would look more closely at them.
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