Dubai banking on rehabilitated image

13 June 2011

Stream of new financings show that lenders have forgiven emirate

Dubai is set to capitalise on its relative stability in the region through a wave of new bond issues and loans to help fund the emirate’s deficit.

The government is currently working on a sovereign bond issue, while Investment Corporation of Dubai (ICD) is close to concluding a $2.8bn loan refinancing. Both are taking advantage of the emirate’s rehabilitation in the minds of banks and bond investors.

Credit default swap (CDS) rates on the emirate, a measure of the probability of a sovereign default, are at their lowest since Dubai admitted it needed to restructure the debts of state-owned conglomerate Dubai World in November 2009. The successful conclusion of the $25bn Dubai World restructuring, coupled with well-received sovereign bond issues and deals from Dubai Electricity & Water Authority (Dewa), and more recently Emirates Airlines $1bn bond issue, have also helped rescue perceptions of Dubai.

“Investor appetite for Dubai is back,” says one Dubai-based banker at an international bank. The Dubai government bond issue is expected to be a success, and the UK’s Royal Bank of Scotland, Switzerland’s UBS and the local Emirates NBD are running the deal.

In reality, the picture is probably more complicated. Dubai is taking advantage of its stable reputation in the midst of regional instability and a glut of liquidity globally that is looking for yield.

“There is a lot of interest in Middle East credit at the moment because investors are getting such low yields in other parts of the world. Investors just can’t get enough of the Middle East and that is driving the success of Dubai’s deals to a certain extent,” says one analyst.

Opportunism is clearly a part of Dubai’s thinking in the latest issue. Bankers say the deal should be a good one for the emirate, in terms of the cost it will have to pay to service the debt. It is also partly timed to mop up some of the investors interest leftover from the Emirates airline transaction, which received offers of more than $6bn from investors.

“Emirates is a well-run global company and that is why its deal was a success,” says one banker close to the airline’s recent issue. “That is not true for every company in Dubai, but the Emirates deal is generally a positive factor for Dubai.”

“The Emirates airline bond is a strong vote of confidence and shows the market is willing and able to take exposure to the right names in the UAE,” says Salman al-Khalifa, Deutsche Bank’s chief country officer for the UAE.

Concerns remain though about the ability of the emirate to payoff, rather than keep refinancing, its debt pile of more than $100bn.

Once the government deal is completed, several other companies are expected to try and quickly complete bond issues. Majid al-Futtaim, another Dubai-based conglomerate, is planning to access bond markets after the state deal is completed.

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