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Dubai-owned firms start bond talks

Several Dubai entities have begun talks with bankers regarding issuing bonds in the near future, a senior Dubai-based banker at Standard Chartered says.

DUBAI // Several Dubai entities have begun talks with bankers regarding issuing bonds in the near future, a senior Dubai-based banker at Standard Chartered says. The talks come as a surprise because many investors are increasingly nervous about the rising cost of debt, tight refinancing schedules and potential losses on portfolio investments at many Dubai-owned companies such as Dubai World and Dubai Holdings. "We are in talks with several Dubai entities here regarding bonds," said Hassan Jarrar, the managing director who heads Standard Chartered's origination and client coverage in the UAE. "We are currently engaged on ratings and bond issuances."

By the end of the year Dubai entities must repay US$6.5 billion (Dh23.87bn), which is part of an overall estimated $85bn of debt. It is still unclear how Nakheel, the developer of the palm-shaped islands, will repay its $3.5bn sukuk maturing in December. Mr Jarrar said it would help if the repayment of Nakheel's sukuk went smoothly. Ratings agencies have also seen the first signs of interest from Dubai entities seeking a rating to issue bonds. "There is one entity that is interested but the talks are extremely tentative and we are not talking about this year," a person familiar with the matter said.

Ratings analysts said it was "feasible" for some top names to come to market, notably Dubai entities involved in building up the emirate's infrastructure such as Dewa, the Dubai utility, or the Road and Transport Authority (RTA). Both companies enjoy regular income streams that they can use to securitise their loans and offer as collateral to investors. Dewa, for example, has issued floating-rate notes that are backed up by its receivables from selling electricity.

Emirates Airline, which has previously issued unrated bonds, could be another potential candidate after falling business travel and cargo volumes and rising costs have squeezed the airline's cash flow, analysts said. The airline's profits fell 72 per cent in the 2008-2009 financial year. Emirates National Oil Company, or ENOC, could be another candidate, bankers said. "I don't think we will see a lot of new issues this year, but that is not to rule out that top names would not issue and that top names could pull it off at a decent price," said Philipp Lotter, a credit analyst at Moody's Investors Service, the ratings agency.

Except for Dewa, which is rated "A1" by Moody's, none of the companies considered possible candidates has ratings. As a result, they would seek a rating as a first step. The financial crisis has all but dried up investor appetite for unrated bonds or made them too expensive to issue. "If unrated entities are looking to tap the post-Ramadan window, it would most likely be too late," said Mr Lotter. It generally takes four to 12 weeks for a rating.

Unlike their counterparts in Abu Dhabi, Dubai-owned entities have not issued any fresh bonds in the past year since the collapse of Lehman Brothers brought local capital markets to a standstill and dried up liquidity. Things may become easier for Dubai entities once Nakheel has repaid its sukuk. The December payment is considered an important test for the emirate's ability to repay its estimated outstanding debt of about $85bn, accumulated during a five-year spending spree. Recent issues show there is continued appetite for loans. Dubai Civil Aviation and Dewa have both issued successful, albeit expensive, syndicated loans recently, raising $600 million and $2.2bn respectively.

But Dewa, for example, had to pay about 300 basis points over the London interbank offered rate (Libor), against about 50 basis points over Libor a year ago. After turning their backs on emerging markets, investors have returned to the region and are showing some appetite for selected regional issuers. Abu Dhabi's Government-related companies such as Aldar and TDIC have profited from the renewed take-up for high-quality debt and issued several billion dollars in bonds in recent months. In the latest deal, the Abu Dhabi National Energy Company, Taqa, sold $1.5bn of notes last week. The issue was heavily oversubscribed.

By contrast, ratings agencies have in recent months downgraded or put on review several large Dubai entities such as DP World and Jebel Ali Free Zone over concerns whether Dubai will be able to meet its debt obligations and bail its entities out if needed. Even Mr Jarrar concedes that the timing appears odd given Dubai's financial challenges. "All eyes are on Dubai and what Dubai Inc will look like in the future," he said.

"It is clear that there will be some challenges in the short term but in the long term the groundwork has been laid for impressive infrastructure. Confidence needs to come back." @Email:uharnischfeger@thenational.ae

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