BofA Sees Loan Payment to Abu Dhabi by Dubai in ’14: Arab Credit

Dubai may make a payment toward its $20 billion loan to neighboring Abu Dhabi and the United Arab Emirates central bank next year as the emirate’s economic recovery solidifies, according to Bank of America Corp.

The payment would be modest and serve to “buoy sentiment,” Jean-Michel Saliba at Bank of America’s Merrill Lynch unit in London, said in a report received by e-mail yesterday, after meetings with policy makers in the U.A.E. BofA recommended holding the emirate’s high-yielding bonds. Dubai’s benchmark 2021 notes have rallied three times more than regional peers in the past year.

Investor confidence in Dubai has improved after three state-linked companies paid or refinanced $3.75 billion of debt in 2012, helping push the emirate’s credit risk to almost a fifth the level it was in 2009, when Dubai was on the brink of default. The economy is set to expand 4.6 percent, on average, between 2012 and 2015, more than twice the average growth in the prior four years, government forecasts show.

“Our meetings consistently conveyed the sense Dubai has shown its ability to grow again at a respectable 4 percent pace” which will help it reduce debt, London-based economist Saliba said in the report. “We expect important 2013 maturities to be met.”

Settling Debt

Borse Dubai Ltd., which owns 20.6 percent of London Stock Exchange Group LLC, and state-owned holding company Investment Corp. of Dubai are likely to meet their debt obligations in 2013, BofA said. Dubai Group LLC will also complete the restructuring of its bank debt by year-end, it said.

The yield on Dubai’s 5.591 percent dollar-denominated bonds due 2021 has fallen 122 basis points, or 1.22 percentage points, in the past year to 3.98 percent at 7:09 p.m. in Dubai, according to data compiled by Bloomberg. That compares with a drop of 38 basis points in HSBC/Nasdaq Dubai’s Middle East Conventional Sovereign Bond Index to 4.23 percent.

Dubai’s outlook has improved amid increased demand for real estate, which along with trade and tourism forms the backbone of the economy. The price of a mid-range villa jumped 35 percent in the year to March, according to brokerage Cluttons LLC.

‘Key Challenge’

Home prices and rents rose for the 16th month in March “highlighting the return of investor confidence in Dubai,” Deutsche Bank AG said in a report yesterday. The government was able to lower its borrowing costs by 40 percent at a sale of $750 million of 10-year Islamic bonds in January, when it also sold its first 30-year securities.

The Department of Finance, which has no immediate plans for further bond sales, aims to extend the average life of debt from 5.5 years to between eight and 10 years, BofA said.

Still, the “key challenge” facing the emirate will be dealing with debt that matures in 2015 onward, including the $4.4 billion loan that Dubai World has coming due in March that year. “Questions remain about the likelihood, structure or necessity of repeat bailouts” of companies such as developer Nakheel PJSC, BofA said.

Dubai policy makers, including Sheikh Ahmed in Saeed Al Maktoum, the head of Dubai’s Supreme Fiscal Committee, have downplayed concern over the emirate’s ability to settle dues.

Fostering Growth

The cost of insuring the emirate’s debt for five years using credit default swaps dropped to 211 yesterday from 360 a year earlier, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The swaps soared to more than 900 in February 2009.

Dubai and its state-owned companies ran up debt of $113 billion as the emirate sought to transform into a tourism, trade and financial services hub, according to International Monetary Fund estimates. The emirate’s Department of Economic Development said the city’s “superior physical infrastructure” is less discussed than upcoming liabilities, although the city derives benefits from it, BofA said.

“These supply-side factors are among those helping to foster growth,” BofA said.