Oct. 28 (Bloomberg) -- Dubai raised $1.93 billion in its first Islamic bond sale, the biggest from the Gulf region this year, as the emirate benefits from rising demand for Shariah- compliant debt.

The Persian Gulf emirate sold $1.25 billion of dollar- denominated, five-year, fixed-rate Islamic bonds, or sukuk, priced to yield 6.39 percent, the government said today in an e- mailed statement. Another 2.5 billion dirhams ($680 million) of local-currency floating-rate Islamic notes priced to yield 5.65 percent. Dubai attracted more than $6.3 billion in orders, the statement said.

Dubai and its state-controlled companies are raising funds after they amassed $80 billion of debt during a four-year real- estate boom, which produced the world’s tallest building and largest man-made islands. The global credit crunch forced the U.A.E government, supported by oil-rich Abu Dhabi, to work on a bailout of Dubai’s two biggest mortgage lenders and deepened concern the emirate may be unable to meet its debt obligations.

“This deal establishes the Dubai-Abu Dhabi link in the mind of the market,” said Norval Loftus, the head of convertible bonds and sukuk at Matrix Corporate Capital Ltd. in London, which oversees $2.5 billion in investments. “That sparked a surge of demand from local investors, paving the way for its long-term success.” Loftus said he bought some of the bonds.

The emirate’s dollar bond pricing equates to a yield spread of 370 basis points above the midswap rate, while its dirham bonds priced at the same spread above the three-month emirates interbank offered rate. One basis point is 0.01 percentage point. The midswap rate was at 2.6975 percent at 12:45 p.m. in New York and the Eibor was at 1.955, according to Bloomberg data.

$6.5 Billion

The sale is part of Dubai’s $6.5 billion medium-term note fund-raising program in which it can sell Islamic bonds as well as debt that doesn’t comply with Shariah law. Medium-term notes are unsecured, continuously offered debt obligations typically ranging from nine months to three years.

“The order book shows that Dubai’s story is gaining credibility,” said Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi PJSC in Abu Dhabi. “The sukuk format makes sense for Dubai now. There has been a lack of issuance in the Gulf sukuk market in recent months and they want to take advantage of the demand for this asset class.”

Saudi Electricity Co., the state-controlled power producer, in July raised 7 billion riyals ($1.86 billion) in a domestic Islamic bond sale. Sukuk are securities that are governed by Shariah laws barring investors from profiting from the exchange of money, as occurs with interest payments on other bonds.

International Sukuk

Sales of international sukuk may rise to $7 billion this year and double in 2010 to $14 billion amid rising oil prices and more liquidity in the Arab economies, HSBC Holdings Plc said last week. Crude oil prices are 77 percent higher this year after plummeting 54 percent in 2008.

Tourism Development & Investment Co., a state-owned developer of hotels in Abu Dhabi, raised $1 billion of five-year sukuk this month at 230 basis points more than the benchmark mid-swap rate. The issue was rated Aa2 by Moody’s Investors Service, the third highest investment grade ranking and an equivalent level of AA by Standard & Poor’s and Fitch Ratings.

The cost of protecting Dubai bonds from default was unchanged at 294 basis points according to CMA Datavision credit-default swap on Bloomberg. The contracts, which fall as perceptions of credit quality improve, reached a year-low of 288 basis points last week after soaring to 977 basis points in February.

“Investors are chasing yield,” said Ali Khan, managing director and head of cash-equity trading at Dubai-based Arqaam Capital Ltd. “It shows a good interest from investors for Dubai debt despite all the challenges from last year.”

First Sale

Dubai is selling bonds for the first time since April 2008 before oil and real-estate prices slumped. Home prices in Dubai tumbled about 50 percent from their peak in the second quarter of last year and may drop another 20 percent this year after a construction boom created thousands of houses just as demand began to evaporate, Deutsche Bank AG said in June.

The sheikhdom and its government-linked companies have to meet $6.8 billion in debt obligations in the fourth quarter, Frankfurt-based Deutsche Bank said in a report last month. Property developer Nakheel PJSC needs to repay Islamic bonds of $3.52 billion in December, while Dubai Civil Aviation Authority has to pay a $1 billion security next month, data compiled by Bloomberg show.

Mitsubishi UFJ Securities International, Dubai Islamic Bank PJSC, Standard Chartered Plc and UBS AG are arranging the sale.

To contact the reporters on this story: Haris Anwar in Dubai on Hanwar2@bloomberg.netLaura Cochrane in London at lcochrane3@bloomberg.net

Last Updated: October 28, 2009 13:11 EDT