Dollar recovery pushes up rates

Wayne Arnold

• Last Updated: October 28. 2009 11:59PM UAE / October 28. 2009 7:59PM GMT

The window for Dubai to climb back into the global credit markets is open, but it is may not be open very wide for very long.

Dubai managed to sell slightly more than US$1.9 billion (Dh6.97bn) in Islamic bonds, or sukuk, yesterday, drawing a surplus of orders by offering investors a risk premium to help it re-enter the bond market for the first time in more than a year.

The sukuk are part of a new, $6.5bn bond programme designed to help Dubai refinance an estimated $85bn in debt owed by the Government and the companies it controls. The new bonds come on top of $10bn Dubai has already borrowed from the Central Bank and another $10bn it hopes to borrow before the end of the year.

The money will go towards making about $6.8bn in loan payments before the end of this year and another $10.1bn next year.

Dubai is looking to sell up to $4bn in conventional bonds and $2.5bn of Islamic bonds so this week’s sale is only the first salvo. By issuing the sukuk before the conventional bonds, Dubai may have been hoping to tap pent-up demand for Sharia-compliant securities, of which there has been a paucity so far this year even as bond issuance has boomed.

But Dubai’s sale appears to have run into a bottleneck of issuance by similarly eager borrowers that helped push rates up this week. Worse, it comes during a slight recovery in the dollar as fresh concerns arise about the global recovery that are nudging yields on US treasuries higher, too.

As a result, Dubai is paying slightly more for its US dollar sukuk – almost 6.5 per cent – than markets are saying it needed to pay, considering the risk of the Government defaulting. It is apparently possible, therefore, to buy Dubai’s new sukuk together with the related default swap, eliminate any risk of default and pocket a tidy profit.

warnold@thenational.ae