June 12 (Bloomberg) -- Dubai set up a $5 billion bond program to help bridge its budget deficit and fund investments as yields fell to the lowest in at least two years this month.
The Persian Gulf sheikhdom will use proceeds from the dollar-denominated bonds for spending on construction and the budget, according to a prospectus distributed by the Regulatory News Service. Yields on Dubai’s $1.25 billion of sukuk bonds due in 2014 fell to the lowest level since their sale in October 2009 to 4.573 percent on June 1 from as high as 6.69 percent on Jan. 31, according to data compiled by Bloomberg. The yield was last at 4.76 percent on June 10.
“There is likely to be solid demand for such a deal,” Chavan Bhogaita, head of the markets strategy group at National Bank of Abu Dhabi PJSC, said in an e-mail today. “There has been a marked improvement in investor sentiment toward the Dubai credit story recently and credit default swaps spreads demonstrate this very clearly.”
Dubai is returning to the bond market for the first time in eight months after the government-owned Emirates, the world’s biggest airline by international traffic, raised $1 billion from the sale of five-year bonds June 1. The bonds were priced to yield 330 basis points over the benchmark mid-swap rate. Emirates and Dubai’s government have no credit ratings.
On June 2, Dubai’s credit default swaps fell to the lowest level after they surged from 325 basis points on Nov. 24, 2009, to 655 three days later as state-owned Dubai World announced plans to restructure about $25 billion of debt. The swaps climbed 4 basis points to 328 on June 10, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market.
Dubai’s budget gap is set to narrow to 3.8 billion dirhams ($1 billion) this year, the lowest level since 2007, according to the bond prospectus. The government hired UBS AG, Emirates NBD PJSC, Mitsubishi UFJ Securities International Plc, Standard Chartered Plc and National Bank of Abu Dhabi PJSC to manage the deal. Deutsche Bank AG will act as the fiscal and paying agent.
The emirate plans to sell a “benchmark-sized” bond, three bankers familiar with the deal said June 9. Benchmark bond typically raise at least $500 million. A sale raising $750 million to $1 billion is “achievable,” Bhogaita said.
Dubai and its companies ran up debt of at least $129.3 billion, according to estimates by analysts at Credit Suisse Group AG, as the emirate borrowed to develop its property, tourism, trade and financial-services industries.
The government raised $1.25 billion in September in its first sovereign debt issue since the state-owned Dubai World sought a delay on debt payments. The bonds generated orders valued at about $5 billion, it said then.
Dubai sold $500 million of notes due 2015 at a yield of 6.7 percent and $750 million of 2020 bonds to yield 7.75 percent. The 2015 yield declined to a low of 5.14 percent on May 19 and was last at 5.24 percent, according to Bloomberg data. The 2020 yield sank to 6.72 percent on June 1 and was last at 6.84 percent.
Dubai, the second-biggest of the seven sheikhdoms that make up the United Arab Emirates, had to seek help from neighboring Abu Dhabi after the global credit crisis pushed property prices down by more than half from their peak in 2008, and frozen credit markets forced some state-owned companies to delay loan payments. State-owned Dubai World signed a final agreement with its creditors in March to restructure debt.
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