Ras al Khaimah (RAK) is paying back $519 million (Dh1.9 billion) of government debt early and replacing most of it with longer-dated borrowings.
The move follows an effort announced last month to "extend the maturity profile" of government debts and use excess cash to reduce them. RAK also wants to consolidate its debt within RAK Capital, an entity created solely to borrow on behalf of the Government.
"RAK is deleveraging to some extent and essentially using excess cash to reduce and term out debt, which is an extremely prudent thing to do," said Abdul Kadir Hussain, the chief executive of Mashreq Capital in Dubai. "They've taken a near-term maturity and replaced it partially with a longer-term maturity and used excess cash to reduce their overall debt burden, which is eminently sensible."
Acting through its Investment and Development Office (IDO), the Government last month told investors it was willing to buy back or exchange up to about $600m of debt.
That included an offer to purchase all shares of a $325m Islamic bond, or sukuk, that matures in 2012 or else exchange them for bonds maturing in 2016. The IDO also said it would use cash surpluses to buy back up to the full value of a Dh1 bn bond that comes due in 2013.
The thinking was likely that "a more efficient use of capital is to repay that debt instead of trying to invest in other things", Mr Hussain said.
Investors holding about $252m of the 2012 sukuk accepted the buyback, according to an announcement today on the Nasdaq Dubai website, while investors with $7.5m of the shares agreed to exchange them for 2016 bonds. RAK will buy all of the sukuk shares that are not exchanged, however, under a provision that forces a full purchase with at least a 75 per cent acceptance rate.
Investors with Dh713m of the 2013 bond also accepted the deal, bringing the total debt RAK will buy or exchange to just over $519m.
Paying back the 2012 sukuk and most of the 2013 bond will reduce RAK's debt substantially, and a source familiar with the transactions said it would also lower the overall amount of interest the emirate pays to service debts. Mr Hussain said the deal was also beneficial for investors, who received a boost when the emirate agreed to buy the debt back at face value. The sukuk was trading at 95 cents on the dollar before the IDO made its offer.
But as it retires some of its debt, the Government plans to add somewhat to its borrowings, issuing $400m of new debt maturing in 2016. That bond is to come with an interest rate 3.4 percentage points higher than government debt benchmarks, or around 5.4 per cent per year.
RAK also launched a pair of yen-denominated bonds worth a combined ¥15bn last month amid recent buoyancy in global credit markets. Those bonds mature in 2030 and 2040.
"Ras al Khaimah is seeking to diversify its revenue sources by leveraging its mineral resources and its strategic location in the Gulf and the Middle East as well as by focusing on the development of its tourism industry," the government said in the prospectus for its yen bonds.
Numerous governments and companies across the Gulf have either sold new bonds or announced plans to do so in recent months on the back of returning interest from international investors in emerging-market debt. Dubai sold $1.25 billion of bonds in September, and Emaar Properties and the Dubai Electricity and Water Authority followed with their own issuances soon after.
Observers say RAK's goals differ from Dubai's, however. RAK is using surplus cash to extend maturities and manage its debts more prudently, but Dubai is tapping global markets to deal with tens of billions of dollars of debt that comes due in the next two years.