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Investors Flock to Dubai’s Sukuk Sale

Rocel Felix / 29 October 2009

DUBAI — Dubai on Wednesday successfully placed nearly $2 billion in new five-year Islamic bonds, the biggest sukuk sale from the Gulf region this year, which received a hearty response reflecting renewed investor confidence in the emirate and lifting doubts about its ability to meet its debt obligations, analysts 
and bankers said.

Bankers said the dollar tranche of the issue was finalised at $1.25 billion, while the dirham note was closed at Dh2.5 billion or about $680 million. The book for the bonds closed at with the dollar tranche attracting $4.9 billion of bids and the dirham tranche receiving Dh5.4 billion.

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, or EIBOR, used for thedirham tranche.

“The strong appetite is a clear indication of the confidence investors have in Dubai,” said Rami Sidani, Middle-East and North Africa head of investments at Schroder Investment Management Limited. “This is a very strong statement for anyone who has doubted Dubai’s ability to raise money, this would reflect positively on the prices of Dubai entities’ bonds trading in the market. Despite a strong recent rally, some of Dubai Inc.’s bonds continue to offer very compelling yields at current levels,”

Dubai’s state-run companies have been hard put to raise funds to restructure  their debts that have piled up to a hefty $80 billion in recent years, as it spent heavily for infrastructure projects in its bid to become a major global financial and tourism hub.

The global financial crisis that unravelled late last year, with oil prices spiraling down, had abruptly interrupted a real-estate boom and raised concerns about Dubai’s financial strength.

Standard & Poor’s said this month  Dubai will likely continue to prop up government-related companies that are in financial distress but may not throw a lifeline to any others that run into trouble.

S&P estimates that Dubai’s government-related entities will pay a total of nearly $50 billion in debt over the next three years — an amount equal to around 70 per cent of the emirate’s estimated cumulative gross domestic product for the same period. It said the majority of these debts will mature in 2011 and 2012.

The government of Dubai last week launched a $6.5 billion bond offer, comprising $4 billion euro medium term notes, and a $2.5 billion sukuk programme. The proceeds would go in part to refinancing a $1 billion bond from the emirate’s department of civil aviation maturing on November 4.

Haissam Arabi, chief executive officer of Gulfmena Alternative Investments said the enthusiastic response to Dubai’s bond sale should put to rest any concerns about the emirate’s faculty to tap into international capital markets.

“This bodes well for future issuance; it is a vote of confidence. The confusion and wrong perception has been dissipated. This reduces any kind of default risk issues and gives comfort for Dubai sovereign issues.”

Investors snapping up Dubai’s bond offer, bolsters the prospects of emirate’s future issuances, said Eckart Woetz, programme manager at Gulf Research Center.

“It is a good time for Dubai to raise capital via bond sales, the spread that investors demand has come down considerably and global markets are still buoyant, possibly confounding economic activity created by fiscal stimulus with a self sustaining recovery.”

The bond sale is the first from Dubai in over a year, and the healthy appetite shown by investors would go a long way in Dubai’s efforts to restructure its debts.

“With the softening of credit crunch and bottoming-out of global economy, there is an improved risk appetite for emerging markets,” said Faisal Hassan, head of research at Kuwait-based Global Investment House. “Dubai is now in a better position to renegotiate its debt pile but how it negotiates the upcoming debt maturities needs to be seen.”

 rocel@khaleejtimes.com

 
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