Big Issue

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Ras Al Khaimah (RAK) is said to be looking to take advantage of the UAE dirham's current liquidity by entering the sovereign debt market.

According to reports, the RAK government is planning to issue a bond to raise Dh1bn to Dh1.5bn. A foreign bank with a large regional presence is thought to be acting as lead-manager, with the bond expected to fund domestic infrastructure developments.

The news is perhaps to be expected, coming as it does on the heels of a Standard & Poor's announcement in January that it had awarded RAK a long-term 'A' rating for sovereign debt. With very little oil reserves of its own, and ambitions to develop a distinctive presence in the UAE's tourism and business sector, RAK is understandably looking toward bond issuance as a means of finance.

The emirate hopes to raise $13.6bn of inward investment in the coming years, split 60/40 between tourism and industry. If achieved, this figure would dwarf RAK's gross domestic product, recorded in 2006 at around $3bn. Total foreign and domestic project investment in the emirate currently stands at $25.9bn: the third highest in the UAE after Dubai and Abu Dhabi, and 5% of the Gulf Cooperation Council (GCC) total.

Although RAK's first government issue, the bond will not be the first to emanate from the emirate. Late last year the RAK Investment Authority (RAKIA) issued a $325m government-backed Islamic sukuk, listed jointly on the Dubai International Financial Exchange and the London Stock Exchange. The benchmark-sized five-year bond was offered at the guide rate of 150 points above the London Interbank offered rate (LIBOR), suggesting some apprehension over the market's appetite for new debt.

Since then, investors have obtained a clearer picture of the extent of the current credit crisis and RAK's new bond is expected to be well-subscribed. Liquidity is currently at an all time high in the UAE, with central bank figures released in February showing M3 supply rocketing by 33.8%. Inflation is also running to double-digit figures, and a well-priced bond issuance would doubtless be looked on by investors as a good retreat from cash.

RAK is planning to invest $800m in roads and infrastructure projects over the next five years. It is not yet clear if the money raised by the bond issuance (which will amount to between $270m and $410m) will go towards these projects; the northern emirates have, for example, recently been promised billions of dollars of federal government funds in coming years to develop their infrastructure. It is likely though that the money will go toward some form of capital project. The previous RAKIA issue contributed toward funding Al Marjan Island, an artificial island which RAK hopes will become a major tourist attraction to the emirate.

RAK's potential bond issuance follows Dubai's own announcement that it would also capitalise on current levels of liquidity through an issue of its own. Dubai entered the bond market in 2003, with a $408m bond that was 1.5 times over-subscribed. Since then developers and government agencies have regularly issued bonds to fund the emirate's large infrastructure projects. RAK will no doubt be hoping that, given its S&P credit rating, a government bond issue will act as a benchmark against which developers can issue their own debt - effectively replicating the Dubai phenomenon.

Regardless of the effect a government issue may have on the domestic securities market, RAK will join the other emirates of the UAE and the rest of the GCC in ruing a down-turn in the Islamic sukuk market, issues of which have slumped by almost half since last year due to the credit crunch. It is not known yet whether RAK's bond will be a sharia-compliant instrument, but if it is, the RAK government may find the market less keen than it had hoped.

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