Dubai: Better bonding

Interest in Dubai’s bond market is undergoing a revival, with enthusiasm tracking the steady rebound of the emirate’s economy. There are still some lingering concerns, however, over whether all bonds can be repaid on time or if another round of rescheduling will be required.

Increasingly, the risk factor in holding Dubai debt is receding, with the threat of default easing dramatically over the past two years. The emirate’s five-year sovereign credit default swaps have dropped from more than 600 basis points at the beginning of 2010 to the present level of 340 points, having started the year at 445.

This lowering of the default threat threshold has resulted in a drop in the yields on some sizeable bonds. State-owned property developer Nakheel, for example, has seen yields on its $1bn, five-year Islamic bond drop back to 14% – well off the peak of 21% when it was first issued last August.

According to Biswajit Dasgupta, the head of trading at Invest AD of Abu Dhabi, the drop in Nakheel’s bond yields is directly related to the improved performance of Dubai’s economy and the perception that the emirate’s risk factor has reduced.

“The improvement in the perception of Dubai is certainly a key factor,” Dasgupta told the Gulf Times in mid-April. “There is an overall sense that the emirate is on the right track and is doing what it needs to do to resolve the problem. The on-the-ground evidence in the form of tourism and hospitality numbers, real estate ... is also helpful.”

The appetite for new Dubai bonds is also beginning to pick up. A number of private and state entities have recently expressed interest in the emirate’s new offerings. Tamweel, a mortgage lender, has said it is considering a new sharia-compliant offering later this year after raising $300m through the sale of Islamic bonds in January.

According to Varun Sood, the acting CEO of Tamweel, the company was in the market for additional funds. “We may potentially go back to the market this year for either a sukuk or securitisation,” he told the Gulf News on April 17. “It would be a similar transaction to what we did earlier this year.”

That the market is seen as keen on new Tamweel debt is, in itself, a major achievement, considering the company restructured and was taken over by Dubai Islamic Bank in 2010.

Dubai-based airline Emirates is another firm eyeing the capital markets, as it considers refinancing a $550m bond set to mature in June. The airline is looking to take advantage of lower borrowing costs, and company officials have said that either a sukuk or a conventional bond issue are being considered.

One move that may boost interest in the market is the UAE central bank’s recent implementation of changes to regulations that restrict the amount of capital local lenders can loan to the government or government-related entities (GREs). As a result, state agencies and private firms may look to the bond market, particularly now as international lenders have cut back in advancing loans until the eurozone debt crisis settles.

Yaser Abushaban, the director of asset management at Emirates Investment Bank, told the Bloomsberg news agency on April 9 that these new regulations, which cap banks’ lending to GREs and the government at 100% of their regulatory capital, will likely mean more activity in the international debt market.

“If you’re limiting banks’ ability to lend to the government and its entities, then they will have to find alternatives, which means tapping foreign banks or tapping international markets directly through bonds,” he said.

Indeed, in late April Dubai announced it was planning to raise $1.25bn from a two-tranche Islamic bond sale. The deal is the emirate’s first after almost a year; it last tapped debt markets in June with a $500m, 10-year issue.

Though the emirate’s economy and the confidence it inspires are on the rise, Dubai is still carrying a heavy debt burden, with estimates that public liabilities are still running at some $80bn, equivalent to just under 150% of last year’s economic output, according to Bank of America Merill Lynch. While many of its debts have been restructured, and interest in new government bonds is growing, Dubai still has a lot to do to further ease its debt load, particularly as much of its outstanding borrowing is due to be repaid by 2017.

Falling borrowing costs and a greater appetite for Dubai bonds will help speed the emirate’s rebound, allowing it to move beyond recovery and back to sustained economic expansion.