Bond and Beyond

Economic News

22 Jul 2010
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Dubai's government is returning to the open bond market, unveiling plans to raise at least $6.5bn through a mix of conventional and sharia-compliant instruments, looking to bank on renewed investor interest and growing confidence in the emirate.

On October 26, the Zawya Dow Jones news agency reported that the Dubai government had released a preliminary prospectus for a Euro Medium-Term Note (EMTN) programme to raise $4bn, with the funds to be used for infrastructure, financing and general budgetary purposes. Analysts predict that the EMTN coupon rates could be a healthy 6% to 7%, a reflection of the fact that a rating has yet to be given to Dubai's debt.

On top of this conventional bond issue, the Department of Finance (DoF) is also looking at raising a further $2.5bn in Islamic bonds or sukuk, seeking to tap into the sharia-compliant segment of the market as it works to spread its investment net as wide as possible.

Dubai officials have made it clear that the new issuances are not connected to the $10bn borrowed through the sale of bonds to the UAE's Central Bank in February to back state firms, or possible plans to raise a further $10bn through the same avenue.

Even before news of the two-bond issues broke, the DoF had already taken its campaign to market the emirate's debt on the road, staging a series of events to generate interest in Dubai's economy.

Having already taken its road show to Hong Kong, officials transited through Dubai for a presentation on October 25 before flying out to Europe, with both London and Frankfurt on the itinerary.

If the two issueances go ahead, they will be the first new bonds sold by the government in 18 months, its last entry into the open market being a $1.7bn bond with a five-year term sold in April last year, before the emirate's real estate sector started to retreat.

While investors may have previously been somewhat wary of buying Dubai bonds after it was announced the state and its various business entities had a combined debt burden in excess of $80bn, fears of possible defaults have been to a degree allayed.

Dubai's renewed activity in the bond market, and increased investor interest, come as confidence and growth start to reappear both in the emirate and across the region. On October 11, the IMF issued its economic outlook for the Gulf states, predicting that regional economies will expand by a solid 5.2% next year on the back of climbing oil prices, revival of global demand and continued government spending.

At the same time, investor confidence in the UAE is on the rise, climbing for the third month in a row according to the results of a survey conducted by Dubai-based bank Shuaa Capital in late October.

Though confidence and prospects may be on the rise, Dubai still has some pressing debt issues to deal with, both in the short and longer term. The government-owned property developer Nakheel has a $3.52bn sukuk maturing in mid December, while the Dubai Civil Aviation Authority has a $1bn bond falling due in early November.

Further down the track, analysts estimate that Dubai has to either refinance or pay-off $10.1bn worth of debt in 2010, with a further $12.1bn the following year and around $15bn in 2012.

Meanwhile, confidence in local capital markets was recently bolstered by Nakheel's repayment of a $1.1bn bank loan in mid-October, ahead of schedule, indicating that the developer would be able to meet its December obligations.

Chavan Bhogaita, the head of credit research at the National Bank of Abu Dhabi, said Nakheel's early repayment was an encouraging sign for bond holders.

"There have been ongoing concerns about Nakheel's ability to meet its financial obligations, and now we find out that Nakheel has paid back what is not an insignificant amount of money," Bhogaita said in an interview with local press on October 20.

While sentiment might be moving in the right direction, it remains to be seen if hard cash will follow. However, indications are that Dubai is on the road to recovery and an increasing number of investors are interested in following the trail.

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