Fixed Income: Oman versus Abu Dhabi

"Despite the attractive yields available along the Oman curve, which entice many investment managers, using our proprietary Relative Value Model the bonds actually look expensive."

Last week rating agency S&P upgraded its rating for Oman by one notch to BB-. The S&P report stated: “we now expect Oman to benefit from higher oil prices and the government's ongoing reforms". Adding, "Higher oil prices and production, about 90% double-dose vaccination rates for those 18 years and above, removal of pandemic-related measures, and public investment spending will drive stronger growth this year." S&P brought its rating for Oman in-line with Moody’s and Fitch ratings of Ba3 and BB-, respectively. 

Oman is the largest Middle Eastern oil producer outside of the OPEC group and is part of the wider OPEC+ alliance. Oman is expected to boost its oil production to 1.135mb/d by 2025, ~18.6% increase from 2021 levels, as OPEC+ relaxes its supply curbs, according to S&P. The rating agency expects Oman to expand by 3.9% this year, up from an estimated 2.1% last year. The nation has based its budget on a “conservative” oil price of $50pb and will therefore enjoy surplus revenue with oil trading above $100pb. 

We have previously held Oman, when it was rated investment grade. However, due to deteriorating economic fundamentals, as oil prices collapsed, we closed our positions, and the nation was subsequently downgraded to junk. We could hold the bond as part of our HY mandate in the Next Generation Strategy but choose not to. Despite the attractive yields available along the Oman curve, which entice many investment managers, using our proprietary Relative Value Model the bonds actually look expensive. The 6.5% 2047 issue for example offers a yield of 6.50%, however, trades at an expected return calculated at -0.4% and there is no credit notch protection in case of downgrade, at -0.05 notches. We would much rather hold high-grade bonds such as the Abu Dhabi Government 4.125% 2047s, rated AA. Although the yield of 3.72% is much lower, the bond offers an expected return of ~7% and has almost 3 notches of credit cushion. A much safer option given the current global market backdrop.

Freddie Coldham
Fund Manager, Fixed Income