Emirates Bond After Dubai Signals Corporate Allure: Arab Credit

Dubai companies are set to pick up the pace of bond sales to profit from lower borrowing costs after yields plunged last week at an offering by the sheikhdom, according to the United Arab Emirates’ biggest bank.

Sales by Dubai-based entities are likely to surpass last year’s $6.95 billion, according to Mohammad Kamran Wajid, head of Emirates NBD PJSC’s investment banking unit. The government lowered its costs by 40 percent when it sold 10-year Islamic bonds on Jan. 22, while also raising debut 30-year debt. Emirates, the world’s largest airline by international traffic, and Dubai Electricity & Water Authority will probably follow the government’s lead, Wajid said.

“Every entity that has been to the market before will be there in the market” this year, Wajid, chief executive officer of Emirates NBD Capital Ltd., said in a Jan. 27 interview. “All major debt restructurings are more or less done, the Dubai growth story has always been there and there’s a lot of confidence now in Dubai on the debt-management side.”

Dubai companies are coming to the market after the city’s credit risk tumbled more than Middle East peers in the past year. Government-controlled Emirates NBD has nine mandates for sukuk and bond sales, including issuers in the region, Asia and Turkey, which may raise $5 billion in total, Wajid said.

Sales Pipeline

Interest in Dubai’s debt has heightened after economic growth accelerated to an estimated 4.3 percent in 2012, a five-year high, and the real estate industry recovered from one of the world’s worst property-market crashes. Issuers in Dubai, one of seven emirates that make up the U.A.E., will take advantage of lower yields to boost cash, diversify their investor base and find alternatives to bank lending, Wajid said.

Credit default swaps for the city, which is home to the world’s tallest skyscraper, dropped by more than half in the past year to 210 basis points on Jan. 25, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The average for Middle East contracts fell 78 basis points, or 0.78 percentage point, to 248 in the same period. Dubai’s swaps were little changed yesterday.

Emirates NBD helped arrange seven bond sales in the six-nation Gulf Cooperation Council in 2012, making it the 15th biggest underwriter, data compiled by Bloomberg show. So far this year, it’s taken part in the Dubai government’s two sales, and is among six banks mandated by Emirates, which started an investor roadshow yesterday for its first bond issuance since June 2011.

Lower Returns

“Bonds and sukuk are now becoming the name of the game and issuers should take advantage of this investor class,” Wajid said.

Tapping bond markets is an alternative amid regulatory pressure on banks to reduce their exposure to government-linked issuers, he said. Bank lending in the U.A.E. rose 2.8 percent in the year to October, less than a fifth the rate of growth in Saudi Arabia, according to central bank data. Selling bonds will “help everyone diversify the funding base and access an alternative investor class,” he said.

Still, Abdul Kadir Hussain, the GCC’s best-performing fixed-income fund manager, said last month returns in the oil-exporting region may drop by about half in 2013 after a three-year rally drove yields to record lows. Bond yields have started climbing from records this month, with that on Dubai’s 5.591 percent securities due in June 2021 advancing 22 basis points in the past five days to 3.99 percent at 3:02 p.m. in Dubai.

Outside Dubai

Emirates’ 2016 notes also fell in that period, taking the yield up 12 basis points to 3.13 percent. Dubai Electricity & Water’s 2020 securities yielded 3.83 percent today, up 20 basis points in the past four days.

The state-owned utility, known as Dewa, may sell Islamic bonds or sukuk this quarter to help repay debt and fund investments, Chief Executive Officer Saeed Mohammed Al Tayer said earlier this month. Even after the past week’s advance, the yield on Dewa’s notes is still poised for the eighth straight monthly drop.

Pursuing bond sale mandates outside of Dubai will help Emirates NBD diversify its business, Wajid said. The lender last month agreed to buy BNP Paribas SA’s Egyptian unit in a $500 million deal, following Qatar National Bank SAQ into the most-populous Arab country.

The bank wants to boost revenue from global business to 20 percent of its total over the next three to five years, from 5 percent currently, Giel-Jan Van Der Tol, general manager for wholesale banking, said in November. Last month, Emirates NBD listed Turkey, South East Asia and South Asia as target markets.

In addition to debt sales, Emirates NBD Capital has four mandates to advise on mergers and acquisitions, including one from a Saudi Arabian company looking for an acquisition in Asia, Wajid said.

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