Dubai’s government returned to the open bond market upon a growing sense that the notoriously ‘profligate’ emirate–as at least one analyst has previously criticized it in comparison to its more steady, oil-fueled sibling Abu Dhabi–can be trusted not to default on its $80bn or so of outstanding debt. On the heels of last week’s proposed Euro Medium-Term Note (EMTN) program which seeks to raise 6.5bn, divided into four billion dollars in EMTN and 2.5-bn in Islamic bond issue, or sukuk, the government on Wednesday successfully placed nearly $2 billion in new five-year Islamic bonds–divided into both a dollar and dirham tranche–the biggest sukuk sale from the Gulf region this year. Pricing was set at 375 basis points plus/minus 10 points over mid-swaps for the dollar tranche, and with the same spread over three-
month Emirates Interbank Offered Rate, or EIBOR, used for the
 dirham tranche.

Strong investor response was seen as a “clear indication” of increased confidence in Dubai, per one analyst. Moreover, the IMF’s latest projections for the region as a whole–a 5.2% increase next year due to climbing oil prices, revival of global demand and continued government spending–favor increased fervor in any form of ‘risk trade,’ including frontier sovereign debt. Such vigor will be welcomed by Dubai especially, which must refinance or repay $10.1bn worth of debt in 2010, $12.1bn in 2011, and roughly $15bn in 2012 (an amount equal to around 70% of the emirate’s estimated cumulative GDP for the same period), and which is the third largest re-export hub after Hong Kong and Singapore, making it particularly vulnerable to widespread slowdown. It is precisely its leverage that has made Dubai default swaps the sixth costliest of 39 emerging markets, per Bloomberg.

Yet is the premium sufficient? As The Economist noted this week, “until recently, investors were expecting Dubai to meet its obligations by running down its assets or rolling over its loans—not by issuing fresh liabilities to new investors.” The piece continued that some bankers expect Dubai’s true commitment to repayment to be a function of how visibly traded the debt in question is; that is to say, “it will try to postpone bilateral obligations, quietly and below the radar,” and local banks, as opposed to foreign ones, “will probably be asked to sacrifice the most.”

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