The yield on Aldar's $1.25 billion, 10.75 percent bond maturing 2014 dropped to 5.52 percent on Wednesday, the lowest since issue in 2009. That was about 350 basis points tighter than in early October, when spreads of Gulf high-yield bonds in general widened sharply because of jitters about the euro zone debt crisis. 

By contrast, the struggling developer's share price has slumped to record lows in recent weeks because of fears of share dilution and an eventual delisting. The company has officially denied it has any plans to delist from the Abu Dhabi stock exchange. 

Aldar, which has developed flagship projects for Abu Dhabi such as the Yas Marina Formula 1 circuit and the world's first Ferrari theme park, has been hit hard by the property crash in the United Arab Emirates.  

But for a private company not benefitting from direct government ownership, it has enjoyed a remarkable level of financial backing from the state. In January last year it received a $5.2 billion rescue package in exchange for some of its key assets.

Early in December, state investment vehicle Mubadala converted a portion of its Aldar bonds into shares, as part of a deal that will eventually see the fund take its stake to nearly 60 percent. And last week, the Abu Dhabi government threw Aldar a new $4.6 billion lifeline, buying more of its assets and retiring a loan.

It was an important signal of Abu Dhabi's stance towards corporate debt problems within the emirate; although it is not making any explicit guarantee, it has apparently decided that during the current turmoil in global markets, it will ultimately do what is necessary to prevent bond defaults. 

"For bondholders the level of comfort from government support has gone from good to great, especially when we consider last week's announcement over and above the various other developments over recent months," said Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi. 

"Even if the yield were to drop over the coming months, Aldar bonds are still likely to command the attention of investors as they are an attractive mechanism for those looking to take on 'Abu Dhabi Inc' credit risk." 

Nick Stadtmiller, head of fixed-income research at Emirates NBD, agrees. 

"Assuming Abu Dhabi maintains its support for Aldar, there is a compelling case for value in Aldar bonds," he said. 

"The government has not made explicit commitments on further support for Aldar, but the history of support -- both directly and through Mubadala — has led many to conclude that Abu Dhabi sees Aldar as strategically important. Any change in the market's assessment of implied government backing for Aldar, in either direction, would likely have a major impact on bond prices." 

Other companies which benefit from strategic importance to Abu Dhabi have also issued bonds, but the level of implied external support for them is already better reflected in their credit ratings and yields. 

For example, the yield on Tourism Development and Investment Co's 6.5 percent, $1 billion bond maturing 2014 was at 3.05 percent on Thursday, up from a record low of 2.35 percent hit in August. The company, tasked with bringing the Louvre and Guggenheim museums to Abu Dhabi, delayed bond issuance plans last year due to unfavourable pricing, and completion of the museums has been delayed for an undisclosed period.

The yield on A-rated Abu Dhabi National Energy Co's 4.5 percent, $1.2 billion bond maturing 2014 is around 2.90 percent, up about 20 bps from its August lows. 

Investors with a stronger risk appetite could consider Dubai's Emaar Properties. The company's 7.5 percent, $500 million convertible bond maturing 2015 was trading at 96.15 on Thursday, yielding about 8.4 percent. The yield on the bond has widened over 200 bps from an August low of 6.2 percent, but investors looking at Emaar, which is just over 30 percent owned by Dubai's government, must factor in the external support level from the Dubai government. Given the less comfortable state of Dubai's state finances compared to Abu Dhabi, and the fact that Dubai has a minority stake in Emaar, the bond is less attractive to some investors. 

"Aldar certainly is more attractive on a relative value basis versus Emaar. In effect, Aldar is Mubadala without a rating," says Thomas Christie, fixed income trader at Rasmala Investment Bank. 

"And for taking on Mubadala risk via Aldar 2014, you get 330 basis points over Mubadala 2014s. That's a big pick-up — barring a rating upgrade by a number of notches on Aldar, which would reduce the coupon." 

Ratings agencies downgraded Aldar last year, with Moody's justifying its action on the grounds that Aldar was a private company and external government support was not guaranteed.  

As a result, the coupon on Aldar's 2014 bond — now rated B3 by Moody's and B by Standard & Poor's, several notches below investment grade — was increased 2 percent to 10.75 percent under the terms of the prospectus, which contains a coupon step provision if ratings fall below investment grade. 

"For the step-up coupon to fall away, the bond issue would have to be upgraded by multiple notches. As per the Department of Finance statement from January 2011 the government of Abu Dhabi views Aldar as a private enterprise, which makes a reclassification as a government-related issuer less likely for the time being," said Martin Kohlhase, analyst at Moody's in Dubai, in an emailed response to Reuters this week. 

In a public statement following the latest government action, Moody's said Aldar's near-term cash flow concerns were more or less taken care of, and that it was in the process of renewing its financial forecasts. So an upgrade by Moody's cannot be ruled out.  

But a seven-notch upgrade by both Moody's and S&P would be needed to take Aldar's rating to its original level at the time of issue (A-/A3) and bring the coupon back down to 8.75 percent. The probability of such an event in the short to medium term seems low to many investors. 

Aldar has been left with a very small portfolio of assets and its exposure to its core business is now limited, making its future business strategy uncertain. For equity shareholders, this is a concern. But for bond investors, Aldar may remain an attractive option even if the yield drops further.