John Irish and Martin Dokoupil
Reuters
DUBAI: Dubai’s government placed almost $2 billion in new five-year Islamic bond issues Wednesday, and bankers said the successful subscription would boost investors’ confidence in the debt-laden Gulf Arab emirate. The global financial crisis hurt Dubai, a United Arab Emirate (UAE) member and the Gulf financial hub, leaving the markets guessing whether it would be able to restructure its debt pile, stemming from past years’ real-estate-fueled boom.
But the latest move and healthy appetite from investors signalled that Dubai is making progress toward restructuring some of its $80 billion debt owed together with its government related entities.
“It’s an important event for Dubai. Overall it indicates a unique risk reward situation,” said a banker involved in the deal. “There’s still faith Dubai will overcome its challenges.”
The final size of the new dollar tranche of the Islamic bond, was $1.25 billion, while the UAE dirham tranche was set at 2.5 billion dirhams ($680.6 million), two bankers said.
The book for the bonds closed with the dollar tranche attracting $4.9 billion of bids and the dirham tranche receiving 5.4 billion dirhams, another banker involved in the deal said.
The pricing was set at 375 basis points plus/minus 10 points over mid-swaps for the dollar tranche and with the same spread over three-month Emirates Interbank Offered Rate (EIBOR) used for the dirham tranche.
Credit default swap rates for five-year Dubai debt stand at just below 300 basis points, well below 943 points in February.
Central European laggard Hungary paid a five-year euro-denominated debt at 395 basis points over mid swaps in July, while rated Abu Dhabi investment vehicle Mubadala Development Co in April paid 395 basis points over US Treasuries for five-years.
The government of Dubai launched a $6.5 billion bond plan last week, consisting of $4 billion euro medium term notes and a $2.5 billion Islamic bond, or sukuk, program.
Bankers have said that the proceeds would help refinance a $1 billion bond from the emirate’s department of civil aviation maturing on November 4.
Bankers also said that high demand shows global investors were hungry for new sukuk issues, after issuance faltered with the global economic downturn, and the new benchmarks would ease future issuance for the debt-ridden emirate.
“It is a great support for Dubai. As for the future issuance, now, they will come up with a larger size issue, with a lower coupon, that can be more expensive than what it currently is, because people will be already used to investing back into Dubai credit again,” a Dubai-based banker said.
“It has been emphasized to the western market once more as this is not an emirate that is on a verge of bankruptcy,” the banker added.
The international bond sale is the first from the emirate in more than a year and promises to brighten the prospects for the Dubai government as it restructures some of the debt owned together with its state-owned firms.
Dubai raised $10 billion in emergency cash from the UAE’s central bank early this year through a bond issue as part of a plan to raise a total of $20 billion to finance obligations still pending.
Investors – often starved of information in a region known for its lack of transparency – were keen to see how Dubai would be able to tap markets under the weight of the financial crisis.
The emirate has about $5 billion to restructure over the next two months, including the world’s largest Islamic bond to date, a $3.5 billion issue, from the developer of palm-shaped islands Nakheel.
“Dubai is benefiting from normalized activity in financial markets,” said Joe Kawkabani, managing director at Algebra Capital. “It does seem very likely they will meet their obligations … and the more they do of these, the more the market will relax.”
“They have support of Abu Dhabi and the central bank and slowly the price will tighten and appetite for Dubai will increase,” he added.
Prices of Nakheel’s sukuk maturing on December 14 rose on Wednesday to 108 from a low of 103 almost two weeks ago.
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