Dubai bond sale a move in right direction

Dubai’s successful bond sale this week was hailed as an important step towards bringing the debt-saddled emirate back on track, but bankers and analysts warned it still needed to raise more money to meet looming repayments.

The Gulf’s leading business hub has been at the epicentre of a regional downturn, weighed down by a collapse in the real estate market and an estimated $80bn mountain of debt.

Earlier this year Dubai’s creditors were concerned the emirate could default, but thanks in large part to succour from the federal government of the United Arab Emirates – of which Dubai is one of seven autonomous statelets – the emirate is now showing signs of recovering from its malaise.

On Wednesday Dubai raised $1.93bn through a five-year unrated Islamic bond sale, further easing concerns that it would struggle to repay its debts. A $1.25bn tranche will pay a coupon of 6.39 per cent, while a Dh2.5bn local currency tranche has a 5.65 per cent coupon.

“Even a month ago the idea of Dubai being back in the debt market seemed far-fetched,” said a Dubai-based banker. “Now they’ve managed it, at a fair price, and that will calm creditors’ nerves.”

According to the bond prospectus Dubai had originally planned to raise $2.5bn but downscaled the size in spite of $6.3bn worth of subscriptions.

The Islamic bond, known as sukuk, is still a significant milestone for Dubai as it seeks to navigate its way out of its debt commitments, said Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi.

“A significant portion of the larger US dollar tranche was sold to overseas investors, and both... tranches have risen in the secondary market, so there is real demand out there,” he said.

Investor sentiment towards Dubai has improved markedly in recent months, after the federal central bank – bankrolled by Abu Dhabi, the oil-rich capital of the UAE – in February bought half of a $20bn Dubai bond programme . The UAE central bank or federal finance ministry is expected to pick up the second $10bn tranche soon.

The second tranche will still be needed, analysts say. Part of the sukuk proceeds will go to pay back a forthcoming $1bn maturity for Dubai’s department of civil aviation in November, and Dubai faces $15bn of looming debt repayments over the next nine months, and $50bn over the next three years, according to ratings agency Standard & Poor’s.

“This doesn’t mean that the good times are back, or new money,” the Dubai banker stressed. “The sukuk proceeds will go to refinancing upcoming maturities. But it takes away some of the refinancing concerns.”

Dubai has also launched a $4bn conventional medium-term note programme, but it is uncertain how soon Dubai will return to the debt markets.

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