Aldar Properties is finding favour among bond investors hunting for high yields, as a flood of international liquidity arrives in the Middle East.
Steady returns in the fixed income market have fallen sharply, as a rush of capital towards bonds results in yield compression first for sovereign debt, then investment-grade corporate credit.
High-yield debt with a "speculative" rating - sometimes known as "junk bonds" - is now starting to benefit.
Despite its speculative grade credit rating, Aldar now returns the sort of yield usually associated with investment grade companies.
Bond yields move in the opposite direction from price, so a falling yield indicates higher demand among investors. Retail investors are piling into Arabian Gulf bond markets and are "starting to emerge as a powerful force in the market", InvestAD wrote in a research report released yesterday.
The yield on Aldar's bonds has fallen from 6 per cent at the start of the year to 3.7246 per cent yesterday. The bonds mature in 2014.
In theory, the Abu Dhabi Government's backing for Aldar means the two bonds should return similar yields over the same maturity period. Abu Dhabi's equivalent five-year government bonds currently yield 0.3546 per cent, generating a negative rate of return once inflation is factored in.
But the lack of an explicit or implicit statement of intention to support Aldar meant investors could benefit from a higher yield, said Nick Stadtmiller, the head of fixed income research at Emirates NBD.
"There's obviously government support for Aldar, both directly and through Mubadala [a strategic investment company owned by the Abu Dhabi Government], who have offered some support," he said. "But when you are evaluating Aldar's credit you need to focus as a standalone entity and focus on how much support it might get."
That factor can be critical for investors making a worst-case assumption, and result in a higher yield, he added.
Both Aldar Properties and Sorouh Real Estate have been in discussion over a US$13.1 billion merger with the "blessing" of the Abu Dhabi Government since March, with investors eyeing further news on the terms of the deal with interest.
Both companies are due to report earnings today.