ANALYSIS-UAE state-linked bonds brush up investor appeal

* Spreads stabilising after Dubai debt crisis

* Explicit guarantees to attract buyers

* Other factors key to secondary activity boost

By Martina Fuchs and Rachna Uppal

DUBAI, Aug 17 (Reuters) - Investors scared off by Dubai's debt crisis are taking a new look at government-related entity debt in the United Arab Emirates, but broad reforms are needed as well as competitive pricing to develop the secondary market.

Dubai's debt woes sparked off an unprecedented flight of capital from the region after state-owned Dubai World announced a standstill on $26 billion in debt in November.

"The crisis has resulted in investors re-pricing their investments taking into account the different meanings of implicit or explicit (support guarantees)," said Nish Popat, head of fixed income at ING Investment Management.

"The market has adjusted re-rating issues based upon their belief of support. Going forward, with the Dubai World issue appearing as if this is resolved, is only the first step in the structural changes that are happening in the region."

Nine months on, spreads between bonds issued by government-related entities (GREs) and UAE sovereign debt are stabilising within ranges more likely to coax investors to buy credits offering fair value and a decent yield, albeit on a more critical creditworthiness basis.

"The widening of quasi-sovereign spreads (versus the sovereign) has been more pronounced for those entities with relatively weaker stand-alone profiles and/or weaker association with the government," said Nafees Akbarali, regional head of fixed income trading at Standard Chartered.

The crisis in the euro zone over several months in the first half led to a second phase of widening spreads, indicating the close correlation of regional markets to global conditions.

TEMPTING YIELDS

Yield spreads of Dubai Holding's 2014 bond versus Dubai's sovereign maturing in 2014 stood at around 900 basis points (bps) on Aug. 16 after peaking at over 2100 bps on Dec. 10.

The spillover from Dubai has also led to a repricing of risk associated with government-related entities (GREs) in the UAE capital, whose AA rating and oil revenues was previously seen as implying financial support was a given.

The individual credit profiles of state investment vehicle Mubadala or Tourism Development and Investment Company (TDIC) have led to spreads widening to a level investors think more realistically reflects the risk since the end of last year.

In Abu Dhabi, yield spreads of TDIC Sukuk versus the 2014 sovereign peaked at 207 basis points in March as Moody's downgraded seven leading GREs in the emirate including Mubadala, but they have since stabilised at around 170 points.

Following the Moody's downgrades in March, the Abu Dhabi government countered it had the fiscal position and reserves to meet its commitments to the firms concerned.

Yet, regional markets are very much driven by investor perceptions. Even without explicit support, a default on an Abu Dhabi state-linked credit is highly unlikely but issuers must still deal with the premiums the market demands. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For the Reuters Insider show please click on: http://link.reuters.com/guw43n

GRAPHICS:

Abu Dhabi sovereign vs TDIC Sukuk

Abu Dhabi sovereign vs Mubadala

Dubai sovereign vs DEWA

Dubai sovereign vs Dubai Holding ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

MARKET DRIVERS

Market participants say a resolution of the Dubai World restructuring and continued falling of spreads globally, combined with more primary issuance from the region, are likely to be key factors determining the direction and pace of growth the secondary market takes.

"We need the primary market to start flowing again in earnest. If we get a few more deals during the second half, Q3-Q4 that would certainly help," National Bank of Abu Dhabi's head of credit research, Chavan Bhogaita said.

Bhogaita added that international investors need to participate in the secondary market to drive volumes and liquidity.

Although current spread levels are likely to be a consideration for investors, the long-term development of the market will depend on other criteria.

"In times of differentiation, transparency, governance and liquidity will be key in attracting flows into any market. Attractive spread levels could lead to some interest, but longer-term trends in the development of the secondary market should be more important," Akbarali said.

DUBAI STILL WEIGHS

Although market sentiment is improving, bonds of equal-rated credits in Dubai and Abu Dhabi are valued differently by investors, as reflected in trading patterns and pricing.

GDP growth for Abu Dhabi is forecast at 3.7 percent this year by the IMF, compared to 0.5 percent for Dubai.

"The global investor is very comfortable with Abu Dhabi, but some still think that Dubai's problems are dragging on," Bhogaita said.

Yet no other bond issuance better illustrates the market's readiness to absorb UAE-related paper in a selective way after Dubai World than that by state utility Dubai Electricity and Water Authority (DEWA).

Paper from the utility sector in the region is rare, driving investor demand. Being a Dubai name, DEWA still managed to print a $1 billion bond in April, oversubscribed and a done deal for investors with a yield of 8.5 percent.

The bond was trading at a discount to Dubai's sovereign 2014 bond earlier this month.

Some fixed income traders and bankers say that a pair of recent Gulf bond deals where governments offered explicit guarantees may go some way towards boosting bond sales but could have market-distorting consequences.

Ultimately, until structural issues are more keenly addressed, the growth of the secondary market may remain muted.

"The crisis has highlighted the greater need for transparency, and, combined with the lack of a yield curve, the growth of the secondary market remains at a slower pace than initially expected," Popat said. (Reporting by Martina Fuchs and Rachna Uppal; editing by Stephen Nisbet)