“New Normal” for Dubai means back to borrowing?

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.”

Debt restructuring in the Frontier

Interesting article from April 24th’s Investment Dealers’ Digest (IDD) regarding Houlihan Lokey (“From Century City To Baghdad”, subscription required), a middle-market investment bank whose restructuring practice has given it an international reputation, and whose decision to rebuff various bulge-bracket suitors over the past decade or so now looks increasingly prudent.

In addition to working with the Russian government on its Soviet-era debt, as well as with the Seychelles, the firm’s sovereign advisory services team is in the midst of helping Iraq ease its debt burden, and has been successful with 42 creditor nations, through meetings and negotiations with various creditors’ central banks, ministries of finance and ministries of commerce.   Bankers are now working on the closing phase with eight nations, the article states.  “There is a lot of traveling to different capitals,” notes Derrill Allatt, a managing director.  “We have had success. There was an agreement with Tunisia 10 days ago.”

Creditors, he states, fall into different categories: Paris Club and non-Paris Club nations, as well as Gulf Coast countries.  Iraq’s Paris Club debt was cured five years ago, and thus the firm now advises on money owed to non-Paris Club nations such as Turkey, China and Hungary (so far $25 billion of non-Paris Club debt has been cured).

“Every country has its own concerns and interests. Quite a lot [of the creditor nations] are understanding,” says Allatt. “Often you work day and night to get things resolved. You just have to work through it until you have an agreement.  Given the way the world economy is I’d expect our business line to keep growing.”