Dubai Sukuk Returns as Emaar Seeks $2 Billion: Islamic Finance

Emaar Properties PJSC plans to sell as much as $2 billion of Islamic bonds, its first in more than six years, as the developer of the world’s tallest tower in Dubai taps appetite for higher-yielding assets.

The government-controlled company said Jan. 18 it will meet fixed-income investors in Europe, Asia and the Gulf for its bond program. The yield on Dubai’s 6.396 percent Islamic note due November 2014 rose 1 basis point to 6.33 percent today, down 373 basis points from a record high of 10.06 percent on Feb. 15, according to Bloomberg data. Emaar’s sukuk will need to yield between 6.5 percent and 7 percent, said Silk Invest Ltd., a London-based fund that specializes in frontier markets.

Dubai World’s debt restructuring and a recovery in the emirate’s property market bodes well for growth, according to Silk Invest. Emirates Telecommunications Corp., the U.A.E.’s largest phone operator, and Dubai’s government also plan sukuk sales as near-zero interest rates in the U.S. and Japan drive investors to emerging markets. Net inflows into developing nation debt reached a record $53.1 billion in 2010, said Cambridge, Massachusetts-based research firm EPFR Global.

“The sukuk should attract a wide base of investors from Asia, Middle East and North Africa,” Usman Ahmed, head of fixed-income at Emirates NBD Asset Management, a unit of the United Arab Emirates’ biggest lender which oversees $300 million in bonds, said in an e-mailed response to questions Jan. 19. “You can’t paint all Dubai-based real-estate companies with the same brush.”

Emaar’s Islamic bond program would be the first corporate sukuk offer from Dubai since the emirate received a $20 billion bailout from the Abu Dhabi government and the U.A.E.’s central bank in 2009. Tamweel PJSC, a U.A.E. mortgage lender controlled by Dubai Islamic Bank PJSC, sold 1.1 billion dirhams ($299 million) of Islamic bonds in July 2008.

Bond Program

Dubai’s government may sell bonds in 2011, Abdulrahman Al Saleh, director general of the Department of Finance, said last month. Etisalat, as Emirates Telecommunications is known, said it will sell sukuk under its $1 billion Islamic bond program, according to a Nov. 11 statement.

Nakheel PJSC, the property unit of Dubai World, may issue an Islamic bond to trade creditors in the first quarter, said Faisal Mikou, executive vice president at Investment Corp. of Dubai, one of three main state holding companies, on Nov. 28.

Real-estate prices in Dubai slumped by almost 60 percent from their peak in mid-2008 as the credit crisis forced banks to curb lending, Ahmed Badr, analyst at Credit Suisse Group AG said Jan. 9. Property is often used as collateral for Shariah-compliant bonds.

Sukuk Sales

Sukuk sales in the six-member Gulf Cooperation Council, which includes the U.A.E. and Saudi Arabia, were $4.5 billion last year, down 75 percent from a record high of $18.2 billion in 2007, according to data compiled by Bloomberg. Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, fell 15 percent last year to $17.1 billion.

Shariah-compliant debt in the six-nation Gulf Cooperation Council returned 13.6 percent last year, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows. Global sukuk gained 12.8 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets rose 12.2 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Junk Rating

Moody’s Investors Service rated Emaar’s sukuk program B1, the fourth-highest junk rating, while Standard & Poor’s rates the company’s foreign debt BB, the second-best non-investment grade. “The negative outlook reflects refinancing risks that Emaar is facing over the coming 18 months,” Moody’s said in an e-mailed statement Jan. 18.

“I won’t buy because it’s not investment grade, but there’ll be plenty of players seeking higher-yielding assets,” Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant assets at CIMB-Principal Islamic Asset Management Sdn., said in an interview from Kuala Lumpur on Jan. 19.

Emaar hired HSBC Holdings Plc, Royal Bank of Scotland Group Plc and Standard Chartered Plc to arrange the investor meetings and will issue subject to market conditions, the company said in its statement. Emaar last sold an Islamic bond in July 2004 when it issued $65 million in five-notes.

The developer issued $500 million of five-year convertible notes last month to pay contractors and convert some of its $1.4 billion of short-term loans into longer-term debt. The 7.5 percent note maturing December 2015 received more than $3 billion in bids. The yield declined 32 basis points last week to 6.35 percent, Bloomberg data show.

Profit Drops

The company in October reported third-quarter net income dropped 7 percent to 612 million dirhams, missing analysts’ estimates, on higher costs and writedowns. About 90 percent of Emaar’s revenue is generated in Dubai, the second-largest sheikhdom in the U.A.E.

Economic growth in the country will accelerate to 3.2 percent this year, from 2.4 percent in 2010, the International Monetary Fund said in October.

“We remain confident that over the long term Dubai’s real-estate sector will recover,” John Bates, head of fixed income at Silk Invest said Jan. 20. “A number of catalysts are slowly improving the outlook, the effective bailout of Aldar, the ongoing Dubai World restructuring as well as various asset sales.”

Aldar Properties PJSC, part-owned by Abu Dhabi government-investment arm Mubadala Development Co., agreed Jan. 13 to sell assets and convertible bonds to Abu Dhabi.

The extra yield investors demand to hold Dubai’s government debt rather than Malaysia’s narrowed 42 basis points to 340 since Dubai World and its creditors agreed to alter terms on $24.9 billion of debt on Sept. 10, data compiled by Bloomberg show.

The yield on HSBC/NASDAQ Dubai UAE US Dollar Sukuk Index, which tracks 10 sovereign and corporate securities, rose six basis points last week to 5.63 percent on Jan. 21. The yield reached 5.53 on Jan. 19, the lowest since May 2008.

“Dubai sukuk isn’t necessarily a ‘bad word’,” Emirates NBD’s Ahmed said. “There is good demand for sukuk that are backed by issuers with sustainable business models.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE