Dubai's proposed US$1.5 billion (Dh5.51bn) sukuk issuance in Malaysia has received a mixed response from investors with some saying the emirate's lack of a credit rating would lead to lower demand in current market conditions.
Officials at the Dubai Department of Finance are exploring options for a multi-currency Islamic bond issuance in the world's largest sukuk market as the emirate refinances its debts.
But Mark Watts, the head of fixed income at the National Bank of Abu Dhabi, said favourable market conditions, which allowed Dubai to issue $1.25bn worth of bonds in September, had turned volatile and caused investors to seek safer assets.
"If you come to market with a bond without a credit rating on it, that's a lot of unknowns to deal with," Mr Watts said.
Irish debt worries and tensions between North and South Korea have caused market conditions to deteriorate significantly, "swamping" the positive liquidity effects of the US Federal Reserve's stimulus measures, he said.
"In a positive risk environment investors are willing to overlook certain things," Mr Watts said. "But in a negative risk environment, the head of risk has to play it from a more cautious side."
Other asset managers also questioned the emirate's sukuk issuance.
"Normally, Malaysian investors are relatively conservative and invest in very high-grade type issuers," Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai, told Bloomberg.
However, Ahmad Alanani, a fixed income analyst at Exotix, a boutique investment bank specialising in frontier markets, disagreed with the negative outlook.
"Dubai coming to Asia isn't really such a bad idea," Mr Alanani said. "There are a lot of foreign investors in the Malaysian sukuk market so I think there'll be appetite."
He said with yields in Asian markets currently depressed, many other regional investors might be attracted to the Dubai issuance.
But Mr Alanani added that "in the long term, if Dubai wants to diversify its funding and come to market to refinance its upcoming liabilities, eventually a rating is a must-have".
Ratings agencies agreed a sovereign rating would help spur investor confidence throughout the UAE.
"A rating could potentially be useful for the Dubai Government as it would provide investors with an independent and objective view of Dubai's sovereign credit standing," said Tristan Cooper, the head analyst for Middle East Sovereigns at Moody's Investors Service.
"The extra transparency that a sovereign rating would provide could boost participation and liquidity in the market for Dubai bonds."