Abu Dhabi banks back $5bn Dubai bond

Asa Fitch and Wayne Arnold

• Last Updated: November 25. 2009 8:40PM UAE / November 25. 2009 4:40PM GMT

National Bank of Abu Dhabi (NBAD) and Al Hilal Bank have agreed to buy as much as $2.5bn each of the Dubai government bonds. Charles Crowell / Bloomberg News

Dubai’s Department of Finance has raised $5bn from two Abu Dhabi banks as part of a $20bn bond programme being managed by the Dubai Financial Support Fund, the government said today.

National Bank of Abu Dhabi (NBAD) and Al Hilal Bank have agreed to buy as much as $2.5bn each of the Dubai government bonds.

The $5bn adds to a $10bn tranche Dubai borrowed from the Central Bank in February. The emirate has been using funds raised under the $20bn programme to support government-owned companies that had borrowed heavily and ran short of cash in the wake of the financial crisis.

Terms of the new bonds were not disclosed, but Abdulla Alotaiba, the general manager of corporate banking at NBAD, said they had been priced “according to the markets”.

The first $10bn tranche came with a four per cent interest rate.

“It’s a commercial decision,” he said. “Being the national bank, we want to protect investors’ interests and support the economy. We always look at investments that are vital for the economy.”

BAD has bought $500m of its share of the Dubai bonds, he said. The bank expects to buy the remaining $2bn over a year as the funds are needed.

“As they need it they will draw on it,” he said. “The timing of it will be subject to their requirements.”

Officials at Al Hilal Bank could not be reached immediately for comment.

Both NBAD and Al Hilal are majority-owned by the Abu Dhabi Investment Council, a sovereign wealth fund that owns Invest AD, a local investment firm.

The sale of the $5bn bond was a sign that Dubai was making strides towards meeting financial obligations and addressing an estimated $85bn debt load at its government-controlled firms, analysts said.

“Dubai’s guidance was that it would raise $20bn,” said Ali Khan, a director at Arqaam Capital in Dubai. “They’ve now raised $15bn, so things are pretty much on track.”

Markets, he said, would probably respond positively to the news. The Dubai Financial Market index today gained 1.1 per cent. The bond, however, was announced after markets closed.

The news comes as Dubai’s credit default swap (CDS) spreads, which measure the perceived risk of default on debt, have risen following a protracted decline that began in the summer. Dubai and its government-controlled companies have several large debts coming due in the next two months, including $4.3bn next month and $4.9bn in the first three months of 2010, according to a Deutsche Bank report.

Those debts include the property developer Nakheel’s $3.52bn Islamic bond that comes due on December 14.

“It looks as if it’s positive for the refinancing risk of Dubai,” said Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai. “With the Nakheel maturity looming, investor sentiment was starting to get more concerned. In the last couple days you started seeing a sell-off in Dubai risk and CDS spreads started widening. This comes at a good time.”

Given that all of the funds came from Abu Dhabi-based institutions majority-owned by the government, he said the fund-raising exercise demonstrated the country’s cohesiveness in addressing financial obligations.