Dubai launched a US$1.25 billion (Dh4.59bn) government bond yesterday, beginning its first round of fund raising since the financial crisis deepened late last year. The emirate's return to international capital markets was followed by word from Emaar Properties that it was also seeking to raise $375 million from a bond sale. Investors and analysts regard the Dubai bond sale as a litmus test for Dubai's recovery from the world's deep economic turmoil.
It also represents the first time Dubai has reached out to international investors since the state-owned Dubai World last November began the process of restructuring $24.9bn of debt. Investors placed bids for more than $5bn of bonds yesterday, four times more than Dubai wanted to raise. Observers said the surge in interest was evidence of confidence in Dubai's recovery despite the recent troubles and proof that investors are beginning to look for higher-yielding debt after a long refuge in safer assets.
"It seems that investors are definitely giving Dubai a strong vote of confidence and rewarding them for some of the painful restructuring they've been able to negotiate during the past nine months," said Mohieddine Kronfol, the managing director of asset management at Algebra Capital in Dubai. "The timing is quite fortunate in that absolute interest rates are low and demand for yield is strong." The Dubai bonds are to be sold in two tranches - one of $500m that matures in five years and another of $750m that matures in 10 years, according to Bloomberg and Reuters reports.
The five-year debt is expected to yield 6.7 per cent, while the 10-year is expected to yield 7.75 per cent. "We are very pleased at the positive market reception to the bond offering, which demonstrates increased investor confidence in the strong long-term value proposition of the emirate of Dubai," said Abdulrahman al Saleh, the director of the Dubai Department of Finance, in a statement. "The Government has taken prudent measures to control costs and manage its budget deficit and this successful issuance provides Dubai with additional liquidity for general budgetary purposes."
But some analysts still have reservations about the emirate's finances. Doubts persist, for example, about the financial condition of Dubai Holding, another government-owned conglomerate, they said. Dubai International Capital, the group's private equity arm, is in talks with banks to roll over a $1.25bn loan that was due earlier this year but has been extended as the negotiations progress. "You still have Dubai Holding unresolved and uncertainties overall, but there is heavy demand for emerging market fixed income and a high-yielding sovereign may do better than expected," said Khalid Howladar, a vice president at Moody's Investors Service in Dubai.
"Given a stagnant recovery and the general refinancing necessary in the next couple of years, the future is difficult to predict. Investors will want to have maximum transparency and know everything that is going on behind the scenes." In an update this week to the prospectus for a $4bn bond programme launched in April 2008, Dubai opened its books to a greater degree than ever before, laying bare many of the hits it took during the financial crisis.
The prospectus update revealed the Real Estate Regulatory Authority was overseeing the cancellation of nearly 500 developments and that the Government had restructured agreements with contractors on the Dubai Metro after its financial ills. It also showed that the Government had direct debts of Dh105.47bn and was running an expected budget deficit of about Dh6bn this year. Investors consider transparency to be a make-or-break issue for Dubai, and a key to unlocking investor demand for Gulf debt and opening up regional markets for other companies and governments to raise money.
"More work needs to get done and we hope they continue moving forward with restructuring and asset sales and improving transparency," Mr Kronfol said. "They shouldn't be complacent. The market has extended some confidence and everyone would do well to note how fragile that confidence can be." Dubai last raised money under the bond programme just weeks before Dubai World announced it would seek a standstill on debt repayments in November.
In a sign that the Dubai bond may already be spurring confidence among bond issuers, Emaar Properties, Dubai's biggest developer, said yesterday that it was looking to raise at least $375m to refinance existing short-term debt. The five-year bond, which has an option to increase by $125m, is expected to yield between 7.25 and 8.25 per cent. "Demand has been extremely strong already," said a banker involved in the deal. "The success of the Dubai bond has been very beneficial and helped to show investors that Dubai is back in the capital market."
Emaar's five-year convertible bond will be aimed at investors from Europe and Asia, the banker said, adding Dubai Electricity and Water Authority was among Dubai names leading the list of other likely issuers after the success of Dubai's sovereign bond. Arab Petroleum Investments Corporation, a lender owned by OPEC governments including the UAE, also said yesterday it was planning to issue a large bond denominated in Saudi riyals. And Qatar Islamic Bank is planning to raise at least $500m through a five-year Islamic bond soon.
* with additional reporting by Bradley Hope