Dubai Bid to Cut $800 Million Loan Rate Said to Be Rejected

Dubai may consider raising a new loan to replace an $800 million facility backed by the emirate’s road-toll receipts after some lenders declined a request to cut interest rates, according to a banker familiar with the plan.

The sheikhdom asked banks to reduce the rate by 100 basis points, or 1 percentage point, after Dubai’s risk of debt default almost halved last year, said the banker, who asked not to be identified because the information is private. The government raised the six-year loan in 2011 at an annual interest rate of 325 basis points above the London interbank offered rate. Dubai may now replace it with a bigger loan, taking advantage of falling interest rates and higher-than-expected road-toll receipts, according to the banker.

The rate of 325 basis points “for a securitized deal in current market conditions is clearly a very attractive rate for the lenders and not so attractive for Dubai as a borrower,” Abdul Kadir Hussain, chief executive officer at Mashreq Capital DIFC Ltd. in Dubai, said by phone yesterday. Dubai’s unsecured five-year bonds are trading at a spread of about 200 to 210 basis points above the benchmark midswap rate, he said.

Dubai’s bond yields are declining as its tourism, hotel and restaurant industries recover from the crash in 2008 that sent property prices plummeting. The economy, the second-biggest in the United Arab Emirates, may have expanded 5 percent in 2012, the fastest pace since 2007, according to government estimates.

Loan Terms

Citigroup Inc., Dubai Islamic Bank PJSC, Emirates NBD PJSC and Commercial Bank of Dubai PSC helped raise the monthly amortizing loan in 2011 in which 11 other lenders participated, according to the banker. A change in the terms needs the consent of all banks, and some rejected the request, the banker said. A Dubai government spokeswoman, who asked not to be identified because of policy, said she couldn’t immediately comment.

Spokesmen for Citigroup, Dubai Islamic Bank, Emirates NBD and Commercial Bank of Dubai, all of whom asked not to be identified because of company policy, also declined to comment.

Dubai’s government last month sold $750 million of 10-year Islamic bonds that were priced to yield 3.875 percent, compared with 6.45 percent for similar-maturity notes in April. The cost to protect Dubai debt using five-year credit default swap prices tumbled 220 basis points to 225 last year after the emirate partly repaid and refinanced $3.75 billion of debt at state-owned companies.

Transport Project

The loan included both conventional and Islamic portions and was aimed at funding transport projects. There’s demand for good quality assets and the securitization of Dubai’s road-toll receipts, known as salik, is now a proven structure and should generate good demand if it’s refinanced, the banker said.

Five-year credit default swaps for Dubai were little changed yesterday at 218 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. Yields on Dubai’s 6.7 percent bonds due October 2015 were little changed at 2.65 percent as of 12:34 p.m. in Dubai, according to data compiled by Bloomberg.

Dubai was on the brink of a debt default in 2009 as the global economic crisis froze credit markets and was rescued by a $20 billion loan from the U.A.E. central bank and the Abu Dhabi government. The emirate ran up debt of $113 billion to fund a property boom and turn into a financial services hub.

Since then the emirate has completed key debt restructuring deals including at state-owned holding company Dubai World, which delayed payments on about $15 billion of bank loans. Home prices in Dubai are making a nascent recovery after declining 65 percent from their 2008-peak, with the average sale price of a mid-range villa soaring almost 30 percent in the year to November, according to data compiled by Cluttons LLC in Dubai.