Dubai received a warm welcome from international investors on Wednesday as the emirate prepared to fill orders of about US$2 billion (Dh7.34bn) for its new Islamic bond. The issue was more than three times oversubscribed, although bankers said the five-year bonds were likely to yield about 6.6 per cent and 5.6 per cent depending on the currency. By comparison, the five-year Abu Dhabi bond due in 2014 yields 3.85 per cent.
"It is only logical that investors expect a higher return for taking on Dubai risk," said Chawan Bhogaita, who heads credit research at the National Bank of Abu Dhabi. The bond is part of the emirate's attempt to pay off some of its $85bn debt, largely amassed during several years of its construction boom. "Things have turned around 180 degrees in the past six months from a time when Dubai was viewed as a high-risk asset," Mr Bhogaita said.
"Now the emirate has demonstrated it can successfully issue paper on its own without any explicit guarantee from the UAE Federal Government." Bankers said they expected to allocate almost $2bn of the sukuk, initially flagged at $2.5bn, starting today. Investors had until 10pm local time to place orders The bond was split into US dollar and dirham tranches, according to a senior banker involved in running the book.
Bankers said that most of the dollar tranche, believed to be about three quarters of the total, was bought by European and Asian investors, while local investors placed orders for most of the dirham-denominated offering. Investors' renewed appetite for Dubai debt is also part of a broader revival of risky asset classes. "The appetite for risk has come back," said Gianluca Giardina, the senior fund manager at Emirates Investment Services, the asset management arm of Emirates NBD. "In addition, there are huge amounts of cash trying to find a home."
Dubai does not have a credit rating and put the process to get one on hold when the economic crisis hit. Last week, the Government of Dubai launched a $6.5bn bond programme, split into $4bn of medium-term notes and a $2.5bn sukuk. Some of the funds are expected to go towards repaying a $1bn bond from Dubai's Civil Aviation Department due next week. Credit defaults swaps, which measure the cost of insuring against default, for five-year Dubai debt stood at 300 basis points on Wednesday, down significantly from almost 1,000 basis points earlier this year. Abu Dhabi and its companies have issued about $9bn in fresh bonds in recent months, which has helped whet investor appetite.
Dubai has also established a $20bn support fund, split into two tranches, to keep its companies up and running. About $6bn of the first tranche is understood to have been distributed. "There are three near-term catalysts that will help to reinstate Dubai's credibility: today's successful sukuk deal; repayment of the $3.5bn Nakheel sukuk in December; and the successful issuance of the second $10bn tranche," said Mr Bhogaita.
Until a few weeks ago, the $4.05bn repayment, including profit, of Nakheel's sukuk on December 14 was widely seen as a litmus test for Dubai's ability to repay its debtors. Now analysts are looking forward to what will happen after an orderly repayment of upcoming debt commitments. "Once this [Nakheel repayment] is achieved, the way to lower spreads for Dubai and Abu Dhabi corporate and sovereign bonds will be open," said Kown Van de Maele, the head of bond management at Dexia AM.