Dubai opts for innovative funding

04 December 2014

Developers and the government are looking to diversify how they finance construction projects in the emirate, with more initial public offerings and bond issues taking place

Dubai’s economy is back in full swing. The real estate market has rebounded, a wave of new hotels, retail destinations and theme parks are under construction, and the emirate’s transport infrastructure is being expanded.

But in contrast to the highly leveraged 2004-08 construction boom, local developers and businesses, and government-related entities (GREs) are now looking to diversify how they finance their ambitious construction projects.

This time around, there is an acknowledgment that piling up short-term bank debt is not the only way Dubai can fund its development. There are ways and means of accessing a more diversified range of funding that can secure borrowers longer tenors and potentially better rates.

Branching out

Initial public offerings (IPOs), rights issues and conventional or Islamic bonds (sukuk) are increasingly being used to raise funding for projects in the emirate.

This year has seen the resurgence of Dubai’s market for IPOs as an increasing number of companies choose to sell shares to fund their expansion plans.

Key fact

The IPO by UAE retailer Marka in April was the first offering to be listed on the Dubai Financial Market (DFM) since 2009

Source: MEED

The IPO by UAE retailer Marka in April was the first offering to be listed on the Dubai Financial Market (DFM) since 2009. The company, which has no track record or existing operations, was able to raise AED275m ($74.9m) by selling 55 per cent of its equity to the public. It was the first greenfield IPO since 2008. Marka will use the funds to establish retail chains throughout Dubai.

The local Emaar Properties, which is expanding its flagship Dubai Mall, raised $1.6bn in September through an IPO of its malls division. It will mainly be paying out the proceeds of the IPO as shareholder dividends, and is also considering listing its hospitality business next year.

Start-up flotations

Emaar’s IPO was followed by another start-up offering by UAE healthcare firm Amanat in October. The AED1.4bn IPO was oversubscribed by about 10 times, with much of the financing coming from local investors.

The firm plans to set up, acquire and incorporate companies in the healthcare and education sectors, in both the UAE and Saudi Arabia. It is planning to make its first acquisition in the first quarter of 2015.

Yet another company with a limited track record went down the IPO route this year, with Dubai-based Meraas Holding deciding to list its subsidiary company, Dubai Parks & Resorts, on the DFM.

Dubai debt
Dubai entity($bn)
Dubai government   29
Other Dubai sovereign debt    26.1
Dubai World and subsidiaries     29.6
ICD and subsidiaries  20
Dubai Holding and subsidiaries    16.1
Other Dubai (Dewa etc)   11.3
Total Dubai debt 132.7
Total including GREs with minority government ownership139
IDC=Investment Corporation of Dubai; GREs=Government-related entities. Source: IMF

Although Meraas is a well-recognised name, Dubai Parks & Resorts is a new company overseeing the development of a leisure and entertainment megaproject, which will include three theme parks, a hotel and several restaurants.

The $2.9bn project is being built at Jebel Ali, between Abu Dhabi and Dubai, and is scheduled for completion in 2016.

“Despite not having its own track record, Dubai Parks & Resorts can rely on the track record of its parent company Meraas, which has developed a very good reputation in local markets for delivering high-quality residential and commercial developments,” said Akber Naqvi, executive director at the local Al-Masah Capital, at the time of the IPO launch.

Meraas decided to combine the share sale with debt financing to fund the megaproject. As the IPO launched, Dubai Parks & Resorts secured a AED4.2bn debt financing with a group of international and local banks.

It will be launched into general syndication to international and regional lenders now that the IPO has closed. The debt financing along with the IPO proceeds, and cash contributions and expenditure by Meraas, is anticipated to be sufficient to cover the project costs, according to the firm. The combined debt and equity funding totals AED10.5bn. About AED8.7bn of this will cover construction costs.

Debt obligations

The Dubai government and its subsidiaries still face extensive debt obligations left from the previous construction boom.

The emirate has a total of $139bn-worth of outstanding debt, including that owed by GREs with minority government ownership, according to the Washington-headquartered IMF.

Yet many GREs are beginning to improve their debt profiles, with some making early repayments of forthcoming maturities this year.

Property developer Nakheel made its final repayment on AED7.89bn-worth of debt in August, completing its debt repayments four years ahead of schedule. 

Dubai World has been in negotiations surrounding a $4.5bn repayment due in 2015 and the $10bn repayment due in 2018.

Dubai World sold its Jebel Ali Free Zone and related entities to the state-owned port operator DP World for $2.6bn in November. It is a move that could provide Dubai World with enough funds to pay off its 2015 debt obligation early. Negotiations surrounding an extension to the 2018 deadline are currently in process.

Yet, with several large projects in real estate and hospitality being launched, a note issued by the IMF in November warned that “close coordination will be needed to ensure that the provision of new supply remains in line with reasonable demand projections”.

Other planned new projects include a $32bn programme of investment to expand the new Al-Maktoum International airport. The growth of Dubai’s transport systems is part of the emirate’s plans to cement its position as a trade, business and tourism hub for the region, as well as to ensure there is adequate infrastructure in place to host the 2020 Expo.

Innovative funding

The bond market in Dubai is also experiencing an upturn as corporates as well as government firms look for more innovative ways to fund their expansion plans.

“Sukuk is becoming more mainstream,” says Mohieddine Kronfol, chief investment officer, global sukuk and Middle East and North Africa (Mena) fixed income at the US’ Franklin Templeton Investments.

In November, DIFC Investments (DIFCI), which owns properties in the Dubai International Financial Centre, raised a $700m 10-year sukuk.

The company said it decided to tap the sukuk market to take advantage of declining borrowing costs. It raised the funding in order to refinance existing bank debt as well as fund the planned expansion of the financial centre. The issuance marked DIFCI’s first return to the debt markets since 2007.

Other high-profile entities that have raised Islamic bonds in 2014 include Dubai Investments Park, which, at the beginning of the year, raised a $300m five-year sukuk. The funding is being used to refinance existing debt and finance the completion of the eighth phase of a mixed-use property development in Dubai.

Dubai’s government issued a 15-year $750m sukuk earlier in 2014 as well. With the emirate planning billions of dollars of infrastructure projects in the coming years, as it prepares to double visitor numbers and host the Expo 2020, the use of Islamic bonds has been touted as a possible means of funding projects.

Although government-level sukuk are rising, corporate and infrastructure sukuk are still considered in their early days. Potential issuers will need to see the terms of a sukuk as more compelling than that of a conventional bond.

Encouraging regulation

Sukuk volumes may also be bolstered in the future by regulation that aims to place caps on bank lending to GREs, brought in by Dubai’s authorities at the start of the year.

This move by the government is not only to encourage responsible lending but also to encourage more corporates to consider the capital markets and the use of sukuk or conventional bonds to fund their expansion rather than relying on bank borrowing.

“Central bank regulations to limit exposure to government entities or states will lead to more transactions like the DIFCI, where companies switch loans to sukuk,” says Kronfol. The recovery in Dubai’s economy and the strong pipeline of schemes is also encouraging lenders to explore how they can capitalise on this growth.

Equipment finance

Some banks are developing specialised equipment financing facilities to support contractors working on a particular project. National Bank of Fujairah (NBF) opened its dedicated equipment finance unit in the third quarter of this year.

Large-scale schemes being developed in Dubai are providing NBF with the opportunity to finance smaller deals covering the supply of equipment to contractors involved in the developments. For instance, the Dubai Canal scheme is just one development that could lead to a strong pipeline of contract financing opportunities.

It is clear the rebound in project activity is creating opportunities across the financial services sector in Dubai. But caution is still advised. As past experience shows, unless companies are backed by strong assets and have ambitions that are realistic and deliverable, those opportunities may in time find themselves overshadowed by the risk involved.

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