Emaar’s 75 Million Reasons Why Bond Sale May Defy Rating

Should Dubai’s Emaar Malls Group LLC sell Islamic debt this week for less than some higher-rated peers, it can thank the more than 75 million shoppers who visited its biggest center last year.

The company, rated BBB- by Standard & Poor’s, the lowest investment grade, may pay less than 3 percent for a five-year sukuk after investor meetings conclude on June 10, according to Emirates Investment Bank PJSC. That’s lower than even Dubai Electricity & Water Authority managed to get when the BBB rated state-owned entity that serves the desert sheikhdom of 2.26 million people issued $1 billion last year.

“It will be Emaar’s tightest debt because it’s not Emaar, it’s specifically the mall unit, which is like the jewel in its crown,” Yaser Abushaban, executive director of asset management at Emirates Investment Bank in Dubai, said by e-mail June 5. Rising occupancy at the malls and strengthening visible cash flows will spur investor demand, he said.

Dubai Mall, which features everything from an underwater zoo to the world’s most expensive gold-sheeted cupcakes, is helping a retail and tourism boom less than five years after the emirate almost defaulted on its debt. Dubai’s economy may expand 5.1 percent this year, the fastest pace since 2007, according to International Monetary Fund estimates.

Main Driver

Profit at Emaar Malls, a unit of Emaar Properties PJSC, rose 56 percent in the first quarter from a year earlier to 329 million dirhams ($89.6 million), data in the sukuk prospectus posted on its website show. The Islamic bond may be priced about 200 basis points over five-year midswaps, according to SJS Markets Ltd., or seven basis points less than the spread over midswaps for the sukuk that Dewa sold in February 2013.

An Emaar spokeswoman, who asked not to be identified because of company policy, didn’t comment on the debt’s potential pricing when contacted by e-mail yesterday.

“Everyone wants a piece of this,” Samer Mardini, the Dubai-based vice president of fixed income at SJS Markets, said by phone June 5. “Dubai’s retail sector is a major driver of its economy, and Emaar plays a big part in it.”

Retail, together with repair services, accounted for 28 percent of the emirate’s gross domestic product in the first half of 2013, according to government data.

‘Good Deal’

At 200 basis points above midswaps, Emaar’s debt would still carry a bigger profit rate than Dewa’s notes. Midswaps rose 10 basis points last week to 1.7243 percent, before climbing four basis points today at 3:46 p.m. in Dubai. They averaged 0.9963 percent the month Dewa sold its debt.

“Mall performance is very favorable, but the overall underlying Emaar story is boosting expectations a bit too much,” Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, said by phone today. “Dewa is a cash cow with a much safer business model.”

Emaar Malls hired Dubai Islamic Bank PJSC, Emirates NBD Capital Ltd., First Gulf Bank PJSC, Mashreqbank PSC, Morgan Stanley, National Bank of Abu Dhabi PJSC, Noor Bank and Standard Chartered Plc for a series of fixed-income meetings in Asia, Europe, and the Middle East starting yesterday, it said in a statement last week.

The meetings come a week after the company said it borrowed $1.5 billion through an Islamic facility priced at 1.75 percent over the London interbank offered rate. Emaar, controlled by the Dubai government, plans to raise as much as $2.45 billion from an initial public offering of the retail unit later this year.

The yield on Emaar’s $500 million of Islamic bonds due July 2019 fell 102 basis points so far this year to 3.52 percent, according to data compiled by Bloomberg. That compares with a 56 basis-point decline in the average yield on sukuk in the Middle East, JPMorgan Chase & Co. indexes show.

“Emaar Malls is a cash generating machine,” Mardini said. “It has an incredible future ahead of it. They’re going to get a really good deal on this sukuk.”

(An earlier version of this story corrected earnings data in the fifth paragraph.)

Before it's here, it's on the Bloomberg Terminal.