Demand stampede for Investment Corporation of Dubai bonds

Dubai's ICD sells $1bn in sukuk and bonds as investors put debt woes behind them. 

Bonds sold earlier this month by the Investment Corporation of Dubai (ICD) sparked demand three times in excess of what was offered, signalling that investors have put debt woes behind them as the UAE’s economy flourishes.

ICD’s sale, the first for the Dubai government investment giant, also comes amid renewed interest in emerging market debt, an asset class that has been battered by the tapering of the US Federal Reserve’s monetary stimulus and political and economic instability in countries such as Russia, Brazil and Indonesia.

The spectre, however, of a sustained period of low interest rates in the US and Europe has attracted investors looking for higher-yield and longer-bond tenures.

ICD, which owns stakes in companies including Emaar Properties and Emirates Airline, said it sold US$700 million of sukuk with a 10-year tenor and profit rate of 3.508 per cent and $300 million of conventional 10-year bonds with a coupon of 4.625 per cent. More than 150 investors took part in the sale on May 14.

“The positive market environment provided an opportunity for ICD to access the debt capital markets, allowing a diversification of ICD’s sources of funding while enhancing its ability to actively invest, both domestically and internationally as growth prospects improve,” said Mohammed Ibrahim Al Shaibani, the chief executive of ICD.

“We are very pleased with the reaction the issuance received from investors. Its success clearly demonstrates both the strength of the ICD portfolio and business model, and the optimism and continued confidence in Dubai.”

Dubai, which was on the brink of defaulting on its debt in 2009 in the aftermath of the global financial crisis, has staged a comeback in the past year or so, with the clinching of the rights to host Expo2020 in November marking a watershed moment in increased investor confidence.

The economy of the UAE as a whole also started to rebound in earnest last year with GDP growth exceeding 4 per cent amid government spending on infrastructure. Decreasing interest rates have prompted businesses to expand and individuals to seek leverage for property and big ticket items. Dubai’s benchmark stock index more than doubled last year and has advanced 47 per cent this year, making it the best performer among global stock indexes tracked by Bloomberg. Property prices advanced by at least 30 per cent in Dubai last year.

“The demand for Dubai debt has been strong in the last few quarters,” said Ram Mohan, a fixed-income portfolio manager at Abu Dhabi-based asset management firm Invest AD.

“The market is giving a signal that the Dubai crisis is behind us and the positive momentum has strengthened further after Dubai won the Expo 2020 in late 2013. The global investment community has come back to the region and is keen to invest in the Dubai fixed income space. The issues from the region in the recent past year have seen good reception by investors and the bond issuances have oversubscribed on a regular basis.”

Mr Mohan said there was an increased demand for longer tenure emerging market bonds by investors because of expectations that central banks, including those of Europe and the US, will continue to aid economic growth with low interest rates and monetary stimulus. Demand for UAE debt in the wider emerging market debt universe has been particularly strong because of the country’s sound economic fundamentals, such as a currency pegged to the US dollar and a healthy current account surplus, he said.

Other emerging markets such as South Africa and Turkey are not faring as well as the UAE and are struggling with current account deficits and weakening currencies.

ICD said Middle East investors bought about 75 per cent of the sukuk, followed by European buyers who snapped up 17 per cent. For the longer maturity 10-year conventional bond, more than 30 per cent of demand came from European investors, while Asian and offshore US investors accounted for 7 per cent each.

Citigroup, Dubai Islamic Bank, Emirates NBD Capital, HSBC and Standard Chartered Bank acted as the so-called joint lead managers and joint book runners of the sukuk, while Citigroup, Emirates NBD, HSBC and Standard Chartered acted as joint lead managers and joint book runners of the conventional bonds.

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Published: May 27, 2014 04:00 AM


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