With big projects in the pipeline, Dubai needs to dip into bonds

This week the Dubai Department of Finance put out a rare press release announcing that Dh7.1 billion of sukuk had been repaid on time and with profit to the holders of the Islamic bonds, in accordance with the terms of the original issue in October 2009.

“Borrower repays debt on time and in full” is not the usual stuff of headlines. If the sukuk were being repaid early, that would have been news of a positive kind, showing the cash-rich emirate could afford to make payments ahead of schedule; if repayment were being delayed, that too would have been newsworthy, although in a rather more negative way.

But repaying on time and in accordance with obligations is what the capital markets expect. To make a news item out of it shows that the issue of debt is still very much on the minds of the policymakers who drive the emirate’s economic and financial strategy, and that they want to take every opportunity to exploit “good” news, even if actually it is rather neutral news.

The recently repaid sukuk was issued in late October 2009, just as Dubai was about to enter the dark days of full-blown financial crisis brought about by the Dubai World “standstill”, announced less than a month later.

It must have seemed a lifesaver at the time, and must also have been comparatively expensive. Speculation about the emirate’s financial vulnerabilities had been growing throughout 2009. In the circumstances it was a job well done just to get the sukuk away at that time.

Repayment is another sign that the bad old days are behind Dubai, at least as far as capital debt markets are concerned. All sovereign and government-related enterprise (GRE) bonds, Islamic or conventional, have been repaid on time and in full over the past five years, even when Dubai had to seek outside help to make the repayments.

In an era when euro-zone sovereigns have been regularly defaulting on debt, that track record is an achievement of which Dubai should be proud.

But the attitude towards bank lenders has been distinctly different. From the start of the Dubai World crisis, Dubai's approach has been to seek restructuring and refinancing of traditional bank debt. The two biggest cases involved Dubai Holding, which finally rescheduled some $10bn of debt, mostly from its financial subsidiary, earlier this year; and Dubai World, which is still in the process of talking to creditors over some $15bn of debt it hopes to restructure.

The Dubai World case is significant. In effect, bank creditors have been asked to restructure the restructuring that was agreed in 2010 by extending the terms of two-thirds of it in exchange for early repayment of the smaller part.

Time is running out on the “early repayment” element of this deal. Some $5bn is due to be paid anyway by next September, so the closer it gets the less financial significance attaches to the “early” element.

Creditors will probably be looking for even more assurance on the remaining $10bn, which is due in 2018 but which Dubai World wants to push back to 2022. This would include guarantees of cash payments via asset disposals and some collateral in the form of shares in the quoted company DP World, of which Dubai World owns 80 per cent.

Despite some posturing, a deal roughly on those terms looks likely in the next few weeks.

But why does Dubai feel able to treat bondholders and bank creditors differently? Part of the answer lies in the fact that the banks have long-term commercial and personal relationships in the emirates, and many have based their regional operations in Dubai. The banks do not want to miss out on new business in the next phase of Dubai growth leading up to Expo 2020.

And Dubai wants to keep the capital markets happy. Quite apart from Expo, there is a lot of funding to be done over the next few years, with new mega-projects being announced regularly.

Developers like Nakheel and Emaar have so far shown a preference for bank lending over bond issuance, which makes sense in a low-interest environment.

But at some stage Dubai — either through a sovereign issue by the government of via the GREs — will have to make a big splash in the bond markets.

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