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Dubai ‘needs credit rating’
The appetite for a first Dubai bond since the debt shock is seen as strong, but a sovereign credit rating would do the emirate a power of good, according to experts.
September 26, 2010 12:18 by Reuters
Although its peers from the seven-member United Arab Emirates (UAE) have continued to access capital markets, the only Dubai name to have launched a bond so far this year has been state-run Dubai Electricity & Water Authority (DEWA), which raised $1 billion via a bond in April.
While the DEWA deal showed the market’s readiness to take on more Dubai risk, the absence of a sovereign credit rating remains an obstacle to widening the range of investors beyond those willing to accept emerging market risk.
“You can still get onto benchmark indices without a rating. But getting a rating is a way of improving your transparency to investors as you have to open your books to the rating agency. Until Dubai gets a rating, it will have to pay a premium,” said one London-based fund manager.
The manager, who declined to be named, said he made this point to Dubai officials during investor meetings earlier this year. Dubai is believed by the market to be intending to obtain a rating, but government officials have not confirmed whether it is doing so.
A credit rating would go some way to improving clarity over Dubai’s creditworthiness, particularly as its state-owned companies sit on more than $100 billion in debt, including $30 billion due to mature in 2011-2012.
Fellow UAE member Abu Dhabi has been rated ‘AA’ by Standard and Poor’s and Fitch Ratings; it is seen by many investors as a stronger credit thanks to its oil revenues.
Investors say pricing on Dubai’s new deal will be determined by whether it obtains a rating and what that rating is.
“There’s appetite, but it has to depend on the pricing and structure…But it’s the right moment in the market,” said Abdulkadir Hussain, chief executive of Mashreq Capital.
Dubai’s five-year sukuk maturing 2014 is trading at a yield of around 6.4 percent. Investors say another comparable credit is DEWA’s 2015 deal, currently trading at 6.755 percent.
Risk perceptions of Dubai have eased since last year and that has been reflected in the falling cost of insuring its sovereign debt. Though Dubai may have to step up asset sales and government borrowing in coming years to cope with the heavy debt repayment schedule for state-linked companies, many investors think its status as a financial centre and support from Abu Dhabi will avert any renewed crisis. Five-year credit default swaps for Dubai have fallen from a 2010-high of 655 basis points in mid-February to around 420 bps.
“CDS spreads…are probably going to stay around there — they won’t come down significantly more from there,” said Mashreq Capital’s Hussain.
A successful bond issue could have an important impact in encouraging secondary market trading of bonds within Dubai, some traders believe. Trading dried up after the Dubai World crisis but in recent months has been showing signs of recovery.
(Reporting by Martina Fuchs and Sebastian Tong; Editing by Andrew Torchia)
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