Abu Dhabi to refinance $20 billion Dubai loans at lower rate

The debt, which includes $10 billion of bonds owed to the Central Bank and another $10bn to Abu Dhabi’s Government, will pay fixed interest of 1 per cent.

Dubai’s reputation was hit after real estate prices plunged more than 50 per cent after the 2009 financial debt crisis. Kamran Jebreili / AP Photo

Abu Dhabi has agreed to refinance US$20 billion of debt it extended to Dubai in the aftermath of financial crisis at a cheaper rate to boost the country’s economic growth.

The rollover is also likely to further reassure investors and add further steam to a rally of the country’s stocks and traded debt.

The Abu Dhabi Department of Finance, the Central Bank of the UAE, and the governments of Dubai and Abu Dhabi signed an agreement yesterday to extend two tranches of $10bn, one loan and one bond, for a further five years at a rate of 1 per cent, the official news agency Wam reported yesterday.

“This is certainly positive news for the Dubai debt story and fixed income investors are likely to perceive it as such,” said Chavan Bhogaita, the executive director of credit and alternatives at National Bank of Abu Dhabi. “It removes the cloud that many saw hanging over Dubai and allows the emirate to concentrate on further strengthening its balance sheet and cash flows.”

The bonds and loan, which were initially issued at a rate of 4 per cent, can also be renewed when they mature in 2019.

"It had been widely assumed that the debt would be rolled over, but the confirmation removes any lingering uncertainty and is highly welcome," said Simon Williams, HSBC's chief economist for the Middle East and North Africa. "Just like the Expo award, it's another key development that allows Dubai to claim that it has put the 2009 crash definitively behind it."

Dubai took out more than $100bn of loans to build a tourism, financial services and trade hub before the financial crisis, building the world’s tallest tower, biggest mall and an indoor ski slope to stand out and attract visitors and investors.

The Dubai World conglomerate triggered the debt crisis in 2009 when it asked its creditors for more time to pay $26 billion in borrowings.

“Signing of these agreements is consistent with the UAE’s prudent financial policy which aims at supporting and promoting economic growth,” said Khalifa Mohamed Al Kindi, chairman of the board of directors at the Central Bank. “We at the Central Bank are constantly seeking to maintain a strong economy and a sound banking sector.”

The country’s economy turned a corner last year, growing at more than 4 per cent.

Dubai’s reputation was hit after real estate prices plunged more than 50 per cent after the 2009 financial debt crisis, but it recorded a spectacular return of confidence in 2013 after years of stagnant asset prices.

Its main equity benchmark more than doubled last year and has gained 20 per cent this year, making it the fourth best performer of primary global indexes tracked by Bloomberg.

Yields on the debt of Dubai’s companies, such as Emaar Properties, have also dropped and property prices have jumped as investors become more confident of the Emirate’s growth prospects.

Ram Mohan, vice president for treasury and capital markets at Invest AD, an Abu Dhabi asset manager, said that he expected the favourable financing terms would help Dubai’s overall efforts to refinance other debt and issue new bonds ahead of Expo 2020.

He added that the refinancing may mean greater demand for existing Dubai debt in the secondary market.

“This will also give a boost to secondary market prices, as the need for immediate new issuance has been avoided and regional investors will be looking to add more of the Dubai complex names into their books based on this positive news,” he said.

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