Dubai plans Salik refinancing on better terms

22 January 2013

Banks refuse to lower interest cost prompting move to refinance early

Dubai’s Department of Finance (DoF) is considering refinancing an $800m loan backed by receipts from the Salik road toll after lenders on the existing deal rebuffed a request to lower the pricing on it.

The original deal closed in July 2011 with a six-year tenor and was priced at 325 basis points above the London interbank offered rate (Libor). In mid-January, the banks in the deal refused to lower the pricing by 100 basis points after the DoF asked banks to drop the interest rate citing Dubai’s improving credit profile.

Bankers say the fact that the emirate asked them to reduce the loan pricing so steeply was evidence that Dubai is reasserting some of the swagger it lost after a humiliating debt crisis in 2009 that pushed it to the brink of default.

Sources close to the deal say that the DoF is now expected to try to refinance the loan in order to get better terms. “They came forward saying they wanted to reprice the deal because Dubai’s CDS [credit default swap] rate has improved and the operational performance of the transaction has been good,” says one banker in the original Salik deal. “They said if banks refuse, then they will go ahead and refinance.”

Another source says that several banks not in the original Salik deal had approached the DoF saying they could secure a larger transaction on better terms if they refinanced the transaction now. “This asset has been performing exceedingly well and they have offers for cheaper funding from other banks,” adds another banker involved in the deal. “But to try and revise the pricing without offering banks anything in return is very unusual.”

When the Salik deal was closed in 2011 it was greeted by bankers as an innovative way for the emirate to lower its borrowing costs by using stable income streams to reassure banks they would be repaid. Even at the time it was so well-received by the market that pricing was cut by 25 basis points. More recently Dubai Duty Free, which operates retail space at Dubai International airport, raised $1.5bn in a deal backed by cashflows from its shopping tills.

The DoF did not respond to requests for comment.

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