Dubai bond sale set to spur credit markets

The Dubai Government's moves in the bond market may open the door for a number of corporate debt issuances. Jaime Puebla / The National

The ease with which Dubai was able to tap bond markets this week will act as a catalyst for a string of companies looking to raise debt as demand for credit from the region shows little sign of cooling off among international investors.

However, analysts warn that Dubai is benefiting as much from investors hungry for returns in markets awash with cheap funding as from a belief in its recovering fundamentals.

The US$1.25 billion (Dh4.59bn) sale of bonds and sukuk debt by the Government of Dubai closed in one day as the full details were announced on Wednesday.

A $750 million tranche of 10-year sukuk paying a coupon of 3.875 per cent represented a lower rate than the Italian government pays on its 10-year debts. An additional 30-year bond sale was also requested by institutional investors, marking a first for the emirate.

"The numbers speak for themselves," said Georges Elhedery, the head of global markets at HSBC, one of the banks that arranged the deal. "The tight pricing, tenor and speed of execution demonstrate international investors' confidence in Dubai's credit."

Global emerging market bonds are being snapped up by investors as a result of low or negative yields available in developed markets, said Daniel Broby, the chief investment officer at Silk Invest, an investor in frontier markets.

"Things are bit frothy at the moment," he said. "Right now, we've got a risk-on environment. As a result, even Angola can tap the debt markets."

Yesterday, investors even witnessed the return of the troubled euro-zone member Portugal to bond markets for the first time since its bailout by the European Union in 2011.

However, historic low interest rates around the world coupled with the perception that the worst of the financial crisis has passed was resulting in some corporate credit in Dubai becoming mispriced, added Mr Broby.

"Anything with any form of yield at all is being bid up right now," he said. "It's time for caution."

There are still unresolved issues with Dubai Government related debt which could cause concerns for investors should they re-emerge, added Mr Broby.

The re-emergence of geopolitical tensions in the region, such as between Iran and Israel, had put paid to market rallies in the past and convinced investors to dump Arabian Gulf debt, said William Jackson, an emerging markets economist at Capital Economics.

"In the past it has led to higher bond yields and a spike in credit default swaps when tensions have risen," he said.

This effect was hard to predict given the amount of liquidity currently available in the financial system, added Mr Jackson.

Yields on Dubai's 10-year bonds rose by 42 basis points yesterday to 3.754 per cent, the first increase in yield in six weeks. Bond yields move in the opposite direction from prices. Because of the dirham pegging to the US dollar, the Central Bank is unable to raise interest rates and must instead follow the lead of the Federal Reserve, which is expected to hold rates at historic lows throughout the year.

Moves by the European Central Bank, expected to begin winding down some of its crisis-era capital injections to lenders later this month, could also contribute to a tightening of credit extended to Gulf corporates, said Mr Jackson.

"They'll probably maintain exposure to the region, but it could make it a bit more difficult," he said.

Deutsche Bank estimates that Dubai has $9bn of debts due for refinancing in the year ahead, equivalent to 7 per cent of GDP.

"Significant amounts of debt will mature in 2014-15, partly as a result of earlier debt restructuring," analysts from the investment bank said in a report last week.

Yet the Dubai Government's moves in the bond market may open the door for a number of corporate debt issuances. Emirates Airline is planning to go to market with a benchmark dollar bond, Reuters reported this week. A benchmark bond is typically around $500m in size.

Dubai Electricity and Water Authority, also known as Dewa, is also said to be planning a $1bn sukuk sale this year.

Dubai's Department of Finance has stated that the bond and sukuk sale helps contribute to two of the emirate's long-term policy goals: the creation of a centre for Islamic industries, and development of a yield curve for domestic debt.

"The Sukuk offering compliments with the vision of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, to establish Dubai as the global capital of Islamic finance while the 30-year bond completes the yield curve for Dubai and matches the long term project requirements of the government," it said.

A yield curve, consisting of many different bonds of different maturities, serves as a pricing benchmark for other companies seeking to issue debts.

The UAE's financial services industry has advocated the development of a yield curve as a means of improving market liquidity and enabling more companies to go to market.

"If Dubai wants to be taken seriously it really needs to have that as part of its arsenal," said Mr Broby.