Flying Shoppers: Dubai hopes airline passengers could ease its debt burden

Flying Shoppers: Dubai hopes airline passengers could ease its debt burden

With its bank credit scarce, Dubai is planning to raise at least $500 million by issuing bonds secured against future revenues of Dubai Duty Free. Will shopping save the day?

March 6, 2012 2:18 by Reuters

Dubai is relying on what it does best to help solve its debt woes: shopping. After successfully borrowing against road toll receipts last year, the flashy emirate now wants to raise at least $500 million by issuing bonds secured against future revenue from its giant airport retailer, Dubai Duty Free. Securitisation is often seen as the last refuge of the cash-strapped, and is nascent in the Middle East. But as Western banks withdraw, it’s looking increasingly attractive.

In an ideal world, Dubai would stick to vanilla financing as it rebuilds credibility in financial markets. But with bank credit scarce, alternatives like Islamic bonds and securitisation are coming into focus. There was plenty of appetite for the $800 million securitisation of Dubai’s toll road receipts last year.

Attempting to copy the trick with Dubai Duty Free should reassure investors that the emirate is willing to put its good assets to work to manage its still-huge debts. Dubai’s core state companies owe an estimated $34 billion, according to Moody’s, with roughly $4 billion due to mature this year. Proceeds from a Dubai Duty Free securitisation would help ease the pain.

The retailer — which is the biggest single airport-based operation in the world, bigger than Singapore and New York’s JFK — seems immune to its host’s woes. Revenue rose by almost 16 percent to $1.5 billion last year. And growth is set to continue. The number of passengers passing through Dubai International Airport has more than doubled in six years to 51 million in 2011, and is expected to hit to 98.5 million by 2020. The current 18,000 square metres of retail space will grow by 44 percent when a new concourse opens this year. In a region dominated by expatriates and where it can be difficult to buy alcohol, a pit stop in the scrum at duty free is a must for many.

On the surface, the risks to investors appear small. In order for revenue to dry up, Dubai would have to lose its status as a regional safe haven or see its crown jewel asset, Emirates Airline, collapse. For Dubai, shopping could truly offer salvation.

CONTEXT NEWS
– Dubai plans to raise funds by selling debt based on future revenues at Dubai Duty Free, one of the world’s largest airport retailers, three sources told Reuters on March 6.

– The Gulf Arab emirate’s Department of Finance is working in tandem with the Investment Corporation of Dubai (ICD), which owns the retail operator, said the sources, who spoke on condition of anonymity.

– Dubai is planning to raise at least $500 million from the securitisation, one banking source said, adding requests for proposals for the transaction was sent to banks and a final mandate was yet to be announced.

– “There is an exercise going on within Department of Finance with ICD to look to see whether there could be a securitisation of Dubai Duty Free funding,” another source, familiar with the matter, told Reuters.

– In July, the emirate completed an $800 million financing deal with lenders based on securitising receipts from its toll road system, known as Salik.

– Reuters: Dubai plans to securitise airport duty free revenues – sources

(The author, Una Galani, is a Reuters Breakingviews columnist. The opinions expressed are her own. Editing by Peter Thal Larsen and Sarah Bailey)