Dubai sold the first sovereign Shariah-compliant bonds this year, with borrowing costs tumbling 40 percent, as the Persian Gulf emirate seized on investor appetite for its debt amid an economic recovery.
The unrated emirate sold $750 million of 10-year sukuk at 3.875 percent, according to six people familiar with the matter, who asked not to be named because the details are private. This compares with a coupon of 6.45 percent on similar-maturity debt in April and an average yield of 2.79 percent for Gulf Cooperation Council notes tracked by the HSBC/Nasdaq Dubai GCC U.S. Dollar Sukuk Index. Dubai also sold $500 million in its first 30-year bonds, the people said.
“The Dubai story looks very good,” said Abdul Kadir Hussain, who was the GCC’s top fund manager in 2012 as chief executive officer at Mashreq Capital DIFC Ltd. “It’s just a manifestation of the amount of liquidity that there is in the sukuk space, particularly for anything that has any semblance of a yield.”
Sales of bonds that comply with Islam’s ban on interest almost tripled to a record $21 billion in the GCC last year as borrowers took advantage of tumbling yields to refinance debt and spend on infrastructure projects. Dubai plans to achieve average economic growth of 4.6 percent between 2012 and 2015, according to the bond prospectus, as trade, tourism and hotel industries expand. That’s more than double the 1.75 percent average growth rate in the four years to 2011.
The government hired HSBC Holdings Plc, Standard Chartered Plc, Emirates NBD PJSC, Dubai Islamic Bank PJSC and National Bank of Abu Dhabi PJSC to arrange the sale, the people said. The notes received about $9 billion of orders, investment bank EFG-Hermes Holding SAE said in a research note received by e-mail today, citing preliminary data.
The yield on Dubai’s 6.45 percent sukuk due May 2022 dropped 11 basis points, or 0.11 percentage point, to 3.89 percent yesterday after the 10-year Islamic bonds were priced, according to data compiled by Bloomberg. They yielded 3.88 percent as of 3:59 p.m. in Dubai.
Dubai’s economy grew 4.1 percent in the first half of 2012, the government said in November, as hotel and restaurant industries expanded more than 16 percent and manufacturing grew 10.4 percent. The economy grew 18.1 percent in 2007 before contracting in 2009 as the city’s real estate industry crashed.
Last year’s growth, set to be the fastest since 2007, helped push the emirate’s credit risk down more than Middle East peers in 2012. The cost of insuring the emirate’s bonds for five years has retreated 16 basis points this month to 209 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
“This new deal is proof that Dubai has regained market confidence, which has allowed them to bring down their borrowing costs significantly,” said Hakim Azaiez, the head of investment at GCA Asset Management in London. “Dubai pulled themselves out of the crisis with phenomenal momentum.”
Dubai, the second-biggest sheikhdom in the United Arab Emirates, raked up $113 billion in debt to turn itself into a regional hub for commerce, transport and financial services, before teetering on the brink of default in 2009. Dubai state-linked maturities, not including restructured loans, amount to about $7 billion this year, almost $32 billion in 2014 and $9.6 billion in 2015, according to Bank of America Merrill Lynch estimates.
“Despite the improving sentiment Dubai needs to address sizable refinancing maturities over the medium term,” Apostolos Bantis, a credit analyst at Commerzbank AG in London, said by e-mail. “The recent pickup in retail, hospitality and real estate sectors are encouraging signs, although any reversal of this trend could weigh negatively on Dubai’s credit story.”
For now, investors are giving the emirate the benefit of the doubt as the government forecast a budget deficit of less than 0.5 percent of gross domestic product this year.
“The improvement in budget deficit is looking very strong, the story overall is quite strong,” Hussain of Mashreq Capital said.
Dubai plans to create an Islamic finance council to regulate equity and fixed-income products as it seeks to become a hub for the industry, taking on centers such Bahrain and Malaysia, home to the world’s biggest sukuk market. Islamic finance will become one of the economy’s “core” industries, the government said this month.
The premium investors demand to own Dubai’s bonds over Malaysia’s 3.928 percent Shariah-compliant notes due June 2015 narrowed six basis points this month to 74 today.