Real Madrid plan pushes RAK debt to 6 month low

Yields on Ras Al Khaimah’s Islamic bonds fell to the lowest in six months after the world’s richest soccer club lent its name to a US$1bn resort in the United Arab Emirates sheikdom. The yield on RAK’s 5.2392 percent sukuk due January 2016 dropped 31 basis points since Real Madrid on March 22 announced the resort to 2.98 percent today. That compares with a 12 basis- point drop on Dubai’s 6.396 percent Islamic bonds due November 2014 to 4.26 percent. Ras Al Khaimah’s sukuk, which pay returns on assets to comply with Islam’s ban on interest, yielded 2.92 percent on May 10, the lowest since October. The Real Madrid Resort Island, to be completed in January 2015 and targeted to attract 1m visitors a year, will have a theme park, a museum and luxury hotels, according to the soccer club’s website. The decline in Dubai’s credit risk following a string of debt repayments and restructurings also helped boost the appeal of Islamic bonds in the UAE, according to Mashreq Capital DIFC. “RAK’s sukuk ticks all the boxes, it’s a sovereign in the UAE, it’s an Islamic bond in a market where there are still shortages of these securities, and its investment grade,” Aliasgar Tambawala, a fixed-income investment manager at Mashreq, said by phone on May 15. “I’m sure the Real Madrid news has some impact because it brings RAK to headlines.” Standard & Poor’s in December and Fitch Ratings in April affirmed Ras Al Khaimah’s A rating, the sixth-highest investment grade. That’s three levels lower than Abu Dhabi, the richest of the UAE’s sheikhdoms, which is rated AA. The fourth-largest emirate of the seven that make up the UAE is “executing a focused development strategy,” and the “economy has recovered well from the global and regional crisis, showing an impressive ability to diversify markets and attract foreign investment,” Richard Fox, head of Middle East and Africa Sovereign Ratings at Fitch, said last month. Like Dubai, Ras Al Khaimah invested in trade infrastructure, such as port facilities, to compensate for a lack of oil and gas wealth. Its two Islamic bonds, which are included in the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index, have the highest S&P ratings among counterparts from Malaysia, Indonesia, Bahrain and Dubai, which is not rated. The yield on RAK Capital’s 8 percent dollar sukuk due July 2014 has fallen 11 basis points, or 0.11 percentage point, since March 22 to 2.7 percent today. It reached a six-month low of 2.67 percent on May 10. The average yield on global sovereign sukuk rose 40 basis points in the period to 3.83 percent yesterday, the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index show. Still, the emirate has to contend with repaying the US$400m sukuk maturing in 2014 and investors have been betting Abu Dhabi will support the smaller state, Akber Khan, an asset- management director at Al Rayan Investment in Doha, said by phone on May 15. “The investment case for the RAK sukuk since issuance has been largely predicated on support at the federal level,” Akber Khan, an asset-management director at Al Rayan Investment in Doha, said by phone May 15. “The Real Madrid deal is interesting news flow, but doesn’t improve the credit fundamentals of the emirate between now and 2014.” Ras al Khaimah’s development plans were hit by the global credit crisis. RAK Properties halted work on parts of Mina Al Arab, a beach resort that included homes and offices, after demand evaporated. The emirate continues to “consolidate its public finances on the back of steady economic growth and the benefits of UAE membership,” Standard & Poor’s said in December. Global sales of Islamic bonds are off to a record start this year as supply trails demand and borrowing costs declined, with companies and governments raising US$15bn, according to data compiled by Bloomberg. That along with improving investor confidence in Dubai, which was rescued from the brink of default in 2009, has lifted Ras Al Khaimah’s sukuk, Mashreq’s Tambawala said. Dubai has pledged to meet financial obligations. Jebel Ali Free Zone, a business park operator, said May 2 it will seek approval from holders of its AED7.5bn (US$2bn) sukuk for early redemption of the trust certificates. DIFC Investments LLC said May 1 it’s “committed” to paying US$1.25bn due June. The yield on Dubai’s sukuk fell 131 basis points so far this year to 4.26 percent today, narrowing the spread over Malaysia’s 3.928 percent notes maturing in June 2015 by 59 basis points this year to 228, according to data compiled by Bloomberg. The premium reached a record low 184 basis points on May 8. Ras al Khaimah, which has little infrastructure compared with Dubai and Abu Dhabi, attracted 835,000 visitors last year, according to its tourism authority. Dubai drew 9.3m with attractions such as the world’s tallest tower, palm-shaped islands and indoor skiing. Ras al Khaimah’s 40 hectare (99 acre) real-estate project on the artificial Marjan Island will also include a marina, yacht club and a Real Madrid museum as well as a football training academy. The centerpiece of the resort will be a soccer stadium in a half circle facing the sea. Real Madrid was soccer’s highest-earning team in 2011, with revenue of 479.5m euros (US$627m), according to an annual report published by Deloitte LLP. Ras Al Khaimah, which shares a mountainous border with Oman, had a population of about 241,000 as of 2009, according to the website of the RAK Tourism Office. “This would definitely put the emirate on the map as a tourist destination given the huge fan base Real Madrid has,” Hussain Albanna, the head of fixed-income trading at Manama- based Bahrain Islamic Bank, said by phone yesterday. “The resort is an ice breaker for more projects, and it’ll boost the emirate’s income.”