Dubai readies first bond issue since debt crisis

Dubai readies first bond issue since debt crisis

Issue part of $4 billion EMTN programme; Mandates HSBC, Deutsche Bank, Standard Chartered; Banking sources: $1 bln issue seen early this week.

September 27, 2010 4:43 by Reuters

Dubai will launch a benchmark dollar bond soon, it said on Monday, and analysts expected robust demand at what will be the Gulf emirate’s first debt sale since last year’s debt crisis.

The United Arab Emirates state, whose firms face some $30 billion in bond and loan maturities in the next two years alone, has been gauging investor interest in a potential issue over recent months.

The fixed-coupon bond will be issued under its $4 billion EMTN programme and the proceeds would be used for general budgetary purposes, the Dubai government said in a statement.

It did not specify the amount but a benchmark bond issue is at least $500 million. HSBC, Deutsche Bank and Standard Chartered will handle the placement.

Banking sources told Reuters last week that Dubai planned to tap the market for up to $1 billion in bonds with a tenor of up to seven years. An analyst at London-based Silk Invest said the issue could be in two tranches of five and 10 years.

The emirate’s most recent sovereign bond sale was launched last October, barely a month before its flagship conglomerate Dubai World shocked global investors by calling for a debt moratorium.

“Investors globally are hungry for good yield, especially in emerging markets, where interest rates are at record lows,” said Richard Fox, head of Middle East and Africa sovereign ratings at Fitch.

“This will hopefully improve appetite for an issue like this. We are expecting a minimum of $1 billion,” he said, adding it will help the emirate fund its 2010 budget deficit.

In August, a Dubai official said the 2010 budget gap would come lower than the 6.0 billion dirhams ($1.63 billion) planned.

The deficit widened to 12.9 billion dirhams last year, the biggest gap since at least 2005 and above 4.2 billion planned, the prospectus for the new issue obtained by Reuters showed.

Dubai’s state firms are sitting on more than $100 billion in debt in total. The government’s indebtedness stood at $28.9 billion in July, the prospectus showed.

Among pressing upcoming obligations is a $555 million loan at Dubai Holding’s loss-making main unit DHCOG, which was due to mature in July but has been extended until Nov. 30. Dubai Holding is owned by the ruler of the emirate.

Some $2.7 billion has yet to be drawn down from the Dubai Financial Support Fund, the prospectus showed.

PRICING

Dubai World reached agreement on a revised debt plan with nearly all creditors earlier this month.

Analysts have said the absence of a credit rating could make the new issue more pricey for Dubai, which accounts for some 80 percent of the UAE’s non-oil trade.

“We’d expect pricing to come at a small premium to the Dubai government’s existing debt,” said John Bates, head of fixed income at Silk Invest.

“The new conventional bonds should come 10-20 basis points wide of that for the five-year and another 10-15 basis points wider still for the 10-year (bond),” he said.

State-owned utility DEWA attracted $11.5 billion in bids for a $1 billion bond in April but had to pay a generous 1.25 percent premium to the underlying sovereign.

The yield on Dubai’s paper maturing in 2014 has come down to 6.4 percent from a high of 10 percent in February.

The emirate is determined to get a credit rating, a top financial official said on Sunday, but not immediately. Such a rating would help its bond issue find wider investor appeal but it would also expose the emirate to regular scrutiny.

($1=3.672 UAE dirhams)

(By Rachna Uppal and Martin Dokoupil. Additional reporting by Martina Fuchs and Enjy Kiwan; Writing by Martin Dokoupil; Editing by John Stonestreet)