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Dana Gas, Aldar Lead Convertible Sukuk Gain on Yield Hunt: Islamic Finance

By David Yong and Khalid Qayum www.bloomberg.com

Convertible Islamic debt sold by Dana Gas PJSC and Aldar Properties PJSC are headed for the best quarter in a year, a sign the Persian Gulf market is reviving.

The yield on the 5.767 percent sukuk due November 2011 issued by Aldar, Abu Dhabi’s biggest real-estate developer, was 7.30 percent, after falling below 10 percent on Aug. 17. Photographer: Matilde Gattoni/Bloomberg

The yield on the 5.767 percent sukuk due November 2011 issued by Aldar, Abu Dhabi’s biggest real-estate developer, was 7.30 percent, after falling below 10 percent on Aug. 17. Photographer: Matilde Gattoni/Bloomberg

Dana Gas’s 7.5 percent bonds due October 2012 yielded 10.77 percent yesterday, down from 13.6 percent on June 30, according to data compiled by Bloomberg. The United Arab Emirates energy company has operations in Egypt and Iraq. The yield on the 5.767 percent sukuk due November 2011 issued by Aldar, Abu Dhabi’s biggest real-estate developer, was 7.30 percent, after falling below 10 percent on Aug. 17.

The combination of plunging yields in developed markets and a successful restructuring of state-owned Dubai World’s $14.4 billion of debt may spur more gains, said Holinger Asset Management and DWS Investments GmbH, which hold Dana Gas and Aldar sukuk respectively. Islamic debt is typically backed by assets because the religion bars payment of interest.

“You still get nice yield pick-up in Dana Gas plus some potential upside on the equity option,” Tobias Bettkober, who helps manage $400 million at Holinger in Zurich, said in an interview yesterday. “In terms of yield, we suddenly got a flat world, meaning 5 percent is the new high yield.”

U.S. non-investment grade bond yields averaged 8.49 percent yesterday, down from 9.18 percent on June 30, according to Bank of America Merrill Lynch’s U.S. High Yield Master II Index. Two- year Treasuries yielded 0.50 percent.

Restructuring Progress

The average yield on sukuk sold by Gulf Cooperation Council borrowers fell 25 basis points last month to 6.52 percent, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It reached 8.76 percent on Dec. 11 after Dubai companies announced plans to restructure debt in November.

Kuwait’s Investment Dar Co., owner of half of Aston Martin Lagonda Ltd. was the first company from the region to default on a sukuk, in April 2009. International Investment Group KSCC, a Kuwaiti finance company, missed a payment this April on convertible notes maturing 2012.

Bonds of Nakheel PJSC, a real estate unit of Dubai World, rallied this year as it offered sukuk to pay contractors as part of its debt restructuring plan. The yield on Nakheel’s 2.75 percent $750 million Islamic notes due in January fell 88 basis points to 14.69 percent last week, according to prices compiled by Bloomberg.

“Bonds have been recovering nicely post Nakheel restructuring,” Skander Chabbi, who manages 3.7 billion euros ($4.8 billion) of bonds at DWS Investments in Frankfurt, said in a Sept. 1 interview.

Best Quarter

Sukuk returned 1.4 percent last month, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing nations gained 2.4 percent, EMBI Global Diversified Index showed. The spread between the average yield for sukuk and the London interbank offered rate narrowed 16 basis points to 385 in August. It was at 377 basis points yesterday.

Global sukuk sales fell 12 percent from a year earlier to $10.3 billion so far in 2010, according to data compiled by Bloomberg. Gulf issuance dropped 24 percent to $2.47 billion. Sales of Islamic and non-Islamic dollar-denominated convertible debt in the Gulf jumped 56 percent to $3.86 billion this year, versus $1.66 billion in all of 2009, the data show.

Dana Gas

Bonds of Sharjah-based Dana Gas returned 8 percent since June 30, the most since the end of last September, even though the company’s share price is below the conversion price of the securities.

Investors may exchange $10,000 face value of Dana Gas sukuk for 19,076.68 shares in the company, or a conversion price of 1.926 dirhams each. The stock has risen 23 percent this quarter to 0.81 dirham, trimming 2010’s decline to 4.7 percent.

Returns on some Gulf debt “are relatively attractive given the implosion in the U.S. and Europe bond yields,” Bettkober said. “Dana Gas, for one, is backed by oil and gas assets.”

The company, which discovered its fourth gas field this year in the Nile Delta, is “undervalued” and may triple in two years, depending on success in Kurdistan and Iran operations, said Bobby Sarkar, an analyst at NBK Capital in Kuwait.

Aldar’s convertible sukuk gained 4 percent since June 30. While bondholders are unlikely to convert with its stock at 2.37 dirhams versus a conversion price of 5.69 dirhams, investors are banking on government support for full redemption at maturity. The company is 19.2 percent-owned by state-backed investor Mubadala Development Co.

“The chances that Aldar will honor its debt commitments is 100 percent,” Majed Azzam, a real-estate analyst at HC Securities in Dubai, said in a Sept. 2 phone interview. “The form of government support is uncertain. Investors are concerned about potential equity dilution.”

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Khalid Qayum in Singapore at kqayum@bloomberg.net.

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