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The problem with sovereign spreads and corporate reform

The problem with sovereign spreads and corporate reform

This year, Bahrain, Qatar and Dubai issued sovereign bonds, and all paid hefty premiums demanded by investors because of the turmoil in global financial markets. Even AA-rated Qatar paid a new-issue premium of about 40 basis points on the five-year tranche of its $5 billion mega bond in November.

December 28, 2011 2:05 by



Entities in Dubai in particular may need to rely on some form of government support to help refinance existing debt or raise new debt from capital markets. Dubai-based GREs could struggle to raise funds next year because of tough markets globally and the fallout from the 2009 Dubai debt crisis.

The head of Dubai’s supreme fiscal committee said this month that the government might look into refinancing part of some $4 billion in GRE debt maturing next year, presumably through issuing new bonds or loans.

Investors remain concerned not only about individual Dubai entities but about Dubai as a whole, however; the sovereign’s five-year credit default swaps are near 450 bps, far above 125 bps for Abu Dhabi. So government borrowing to help individual Dubai GREs might not instil much confidence in the emirate’s overall ability to handle its debt problems.

Bhogaita said a centralised funding strategy should only be a short-term solution.

“Otherwise there would likely be adverse consequences such as negative impact on the development of the regional bond markets and on investor sentiment, both of which would undo some of the valuable work done up to now by governments and issuers in the context of global capital markets.”



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