On Feb 24, BNP Paribas credit analysts Raffaele Semonella and Vivek Tawadey argued that given current elevated (although confined) geoplitical risk:
investors should consider switching out of some of the more tightly priced European consumer and industrial companies (that are vulnerable to higher commodity input prices) into some of the best regional credits in the MENA region, particularly those more resilient to political instability in the region.
we caution that elevated levels of regional geo-political risk add to the timing of such investments as negative headlines will lead to volatility, and therefore might suit buy and hold investors.
Their criteria:
- Recommended names are in Abu Dhabi or Qatar – the two wealthiest sovereigns in the MENA region which are unlikely to suffer from regional contagion.
- All credits rated in the AA or A category with a stable outlook.
- In key sectors like hydrocarbons that are likely to benefit from high oil and gas prices.
- All companies benefit from implicit or explicit state support.
- Companies benefit from significant liquidity.
- Spreads trade in the mid - low BBB category (if not lower) - offer compelling risk return on a relative value basis.
And their calls:
TAQAUH (A3/Stable) is an Abu Dhabi based electric and water utility with international oil and gas activities. The Government of Abu Dhabi (Aa2/AA) owns 72.1% of the company and has recently stated that it will continue to offer broad and ongoing support to TAQA. The company’s domestic downstream utility portfolio accounts for 98% of the emirate of Abu Dhabi’s electricity and water requirements. TAQA’s upstream division engages in exploration, production, development and storage of oil and gas in Europe and North America. In 9M 2010, power and water activities accounted for 58.4% of the company’s revenues, while revenue from oil and gas accounted for 41.6%. The company’s international upstream activities are likely to benefit from the increase in oil prices while remaining largely unaffected by protests in the region.
- The closest peer we can think of for TAQA is Dong Energy (Baa1/A-, Stable), a company with a portfolio of exploration and production as well as power assets. TAQAUH 5.62% $ notes due 2012 trade at an adjusted I- spread of 230bp, which is 205bp wider than DANGAS 3.5% € bonds due 2012 trading at an I-spread of 25bp.
Qatari Diar (Aa2/AA, Stable) is a real estate investment fund fully owned by the Qatar Investment Authority, the sovereign wealth fund of Qatar. The bonds carry an irrevocable and unconditional guarantee by the Qatari government but trade significantly wider than similar dated sovereign bonds. QATDIA 5% $ bonds due 2020 trade at an I-spread of 188bp offering a 33bp pick up compared to the Qatari Government sovereign bonds.
- The bonds offer an attractive yield of 5.3% compared to similar maturity peripheral European sovereign bonds, including Italy 3.75% € bonds due 2021, currently offering a yield of 4.8%.
Mubadala (Aa3/AA/AA, Stable) is a fully owned government entity based in Abu Dhabi and was created with the main mandate to implement the Government’s diversification strategy both locally and internationally. The Government of Abu Dhabi has in the past provided significant financial support and has in a number of occasions publicly stated that it stands fully behind the company. Mubadala domestic investments include a 51% stake in Dolphin Energy, a project responsible for transportation of gas from the Qatari north field to the UAE. Mubadala’s portfolio also includes a number of international investments, including a 7.5% stake in Carlyle Group, a 0.65% stake in General Electric and a 19.9% stake in Advances Micro Devices, a California based semi-conductor company.
- Mubadala’s 7.625% $ notes due 2019 trade at an I- spread of 198 and offer a yield of 5.2%, which compares favourably to similar rated European investment holding companies, including Investor AB 5.25% notes due 2019, which currently offer a yield of 4.9%.
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