By Babu Das Augustine, Deputy Business Editor www.gulfnews.com
Dubai: Dubai’s Department of Finance, which launched a roadshow for a benchmark-sized sovereign bond issue in London yesterday, is likely to launch a dual tranche issue with 5-year and 10-year maturities, bankers familiar with the fundraising process said yesterday.
“Initial indications show there is huge demand for Dubai debt on improved risk perceptions of fixed income investors on Dubai sovereign.
A dual tranche issue could offer a better pricing spectrum for both the issuer and investors,” said a banker.
Analysts said improved risk perception about Dubai will help the latest bond issue command better pricing.
Risk perception
“I think risk perceptions have changed somewhat. Dubai still trades at a significant risk premium to most sovereigns in the region, but credit risk has declined considerably as the economy has improved, restructurings have been completed or are close to completion and, at least up until the past few weeks, general market conditions have been strong,” said Abdul Kadir Hussain, Chief Executive of Mashreq Capital.
The Dubai government raised $1.25 billion in September last year in its first sovereign debt issue since Dubai World sought a standstill on debts of nearly $25 billion in November 2009. The bonds generated orders valued at about $5 billion.
Dubai sold $500 million of notes due 2015 at a yield of 6.7 per cent and $750 million of 2020 bonds to yield 7.75 per cent.
Yield sank
The 2015 yield declined to a low of 5.20 per cent earlier this month. The 2020 yield sank to 6.70 per cent last week.
“Judging by the market response to Emirate Airline’s recent $1 billion bond issue and the tightening CDS spreads for Dubai sovereign over the past three months, I expect to see good demand for the latest bond issue from international investors.” said Chavan Bhogaita, head of the markets strategy group at National Bank of Abu Dhabi.
Fixed income analysts expect tighter pricing of the latest Dubai sovereign offering.
Cheaper financing
Last year, Dubai Electricity and Water Authority’s $2 billion bond sale was split between $1.5 billion of 10-year, 7.375 per cent bonds priced at par to yield 493.2 basis points more than similar-maturity US Treasuries, and $500 million of 6.375 per cent notes that pay 522.1 basis points more than benchmark.
The aggregate order book for Dewa closed in excess of $13 billion with the issue commanding tighter pricing than the sovereign issue.
Dewa obtained cheaper financing than the sovereign because it sold bonds through a so-called 144a transaction, allowing the utility to tap US investors who couldn’t participate in the Dubai offering.
Earlier this month Emirates, the world’s biggest airline by international traffic, raised $1 billion from the sale of five-year bonds.
Credit standing
Analysts expect the pricing of Dubai sovereign could be wider than Emirates airline’s. On a standalone basis, Emirates has better credit standing in the market.
“A company like Emirates has a long track record as a profitable entity while Dubai sovereign has numerous contingent liabilities and transparency issues that make investors more comfortable with the corporate entities than the sovereign,” said an analyst.
Dubai Appetite for Dubai debt has been rising in recent months, with the emirate seen as a safe haven in the Middle East and North Africa.
In the context of the regional political turmoil, Dubai, Abu Dhabi and Qatar are likely to attract maximum foreign investment. “These three sovereigns have reinforced their status as politically and financially stable and that is clearly reflected in the tightening credit spreads amidst the regional political unrest,” Garbis Iradian, Deputy Director of IIF for Africa and Middle East, said.
Steady recovery, except real estate
Analysts said key sectors of Dubai’s economy with the exception of real estate have seen steady recovery. Dubai’s budget gap is set to narrow to Dh3.8 billion this year, the lowest level since 2007, according to the bond prospectus.
“Dubai risk has performed very well in recent months. After widening out at the start of the year in response to regional events, it recovered smartly and is currently trading at some of the tightest levels of the year.
Reasons
“The main reasons for this in my view are: Growth in all but the real estate sector of the Dubai economy; progress on the various debt restructurings/refinancing and UAE regional safe haven status,” Abdul Kadir Hussain, Chief Executive of Mashreq Capital, said.
Earlier this month, Dubai’s default risk fell to the lowest level. The Dubai CDS (the cost of protecting Dubai’s debt against default) dropped to 322 basis points in the beginning of this month.
Bankers said yesterday that a successful sovereign issue from Dubai could prompt more bond issues from government related entities looking for refinancing.
“Entities like Dubai Holding, Jafza, DIFC etc all have bond maturities in the next 12-18 months, and if it is their plans to use the bond markets to refinance some of this maturing debt, then now is as good a time as any. Once the window closes at the end of this month, it will be difficult to do a deal before September and who know what market conditions will be at that point,” said a fixed income analyst.
