Dubai bond sale watched by region

Gulf sovereign funds and companies are relying on a successful sale as a signal to issue their own paper.

Region watches issuance with hope Gulf sovereign funds and companies rely on successful sale as signal to issue own paper Bradley Hope and Tom Arnold Dubai's first sovereign bond issuance since its debt crisis last November will play a key role in the emirate's recovery, bankers said yesterday. The Dubai Department of Finance announced it would issue the bond soon and use the proceeds for "general budgetary purposes".

It was not clear yesterday how much the Dubai Government hoped to raise from the US$4 billion (Dh14.69bn) Euro Medium-term bond programme. "This bond issuance is going to establish a very important pricing benchmark for the Government of Dubai," said Suketu Sanghvi, the senior director of structuring and investments at Essdar Capital. "It's going to be very important for issuances in the future." The yield of the bonds will be determined by how confident investors are in Dubai's debt. A multibillion-dollar pipeline of bond sales in the Gulf from other companies and sovereign entities will hinge on a successful bond issuance from Dubai.

Deutsche Bank, HSBC and Standard Chartered were hired by Dubai to manage the sale. The disclosures in the bond prospectus released yesterday painted a picture of an economy in recovery. Dubai said it had slashed government expenditures by 14 per cent and would narrow its budget deficit to Dh5.99bn from Dh12.9bn last year. The Government was still committing almost a third of its expenditure to infrastructure and reported almost 500 property developments had been cancelled or would be soon.

Dubai also revealed its "aggregate direct debt" was Dh105.47bn, excluding the large debts of the government-related Dubai World and Dubai Holding conglomerates. Mark Watts, the head of fixed income at National Bank of Abu Dhabi, said he welcomed any increase in transparency of debt issuances. "That will decrease borrowing costs - the more transparent a borrower is, the less uncertainty there is," Mr Watts said.

"In markets like we have experienced in the last couple of years they'll be penalised if they're not transparent." If Dubai succeeds with its issuance, government-related companies in the emirate will be tempted to issue their own paper, said Simon Penney, the chief executive of the Royal Bank of Scotland (RBS) for the Middle East and Africa. "Market conditions are good. There is demand from investors," Mr Penney said. "For this part of the world there has been very little supply. Everything we require is there. Provided Dubai gets a bond away this week the synopsis for the next two to three months is positive."

RBS is hoping to handle up to $10bn in bond sales in the region this year, mainly from sovereign and sovereign-related entities.   RBS was one of the lead managers on the Dubai Electricity and Water Authority's $1bn issue in April and also managed the $3.5bn bond sale of Qatari Diar Finance in July. "The same investors that look at Dubai … look at the region," Mr Penney said. "The sentiment of Dubai does have a ripple effect on sentiment in the region."

Analysts said yesterday Dubai's confirmation of a debt issuance came after several positive signs for the emirate's economy, including a 15 per cent increase in the value of the Dubai Financial Market this month and the successful restructuring of $24.9bn of Dubai World's debt. There was a sense of a "thaw" in the economy, which had been frozen since Dubai World announced on November 25 last year that it would seek a standstill on its debt payments, according to a senior banker at the Dubai International Financial Centre.

"A year later, there's a general sense that things are starting to come back in terms of deals and investments," the banker said. Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, said in an interview with Bloomberg on Sunday the emirate was recovering after Dubai World reached a debt-restructuring deal with 99 per cent of its creditor banks.   "We are back," Sheikh Mohammed said, according to the transcript.

Shares in Dubai Islamic Bank ended up yesterday after the bank took a majority stake in Tamweel, one of the UAE's two big Islamic mortgage providers, signalling an end to almost two years of inactivity at Tamweel and suggesting the property sector could be recovering. "We need to get a few regulatory clearances, but we expect to be back in business within a few weeks," said Wasim Saifi, the chief executive of Tamweel.

Oil prices yesterday rose to almost $77 a barrel, providing further positive sentiment to the economic outlook for the region. "In the Middle East, circumstances have the feel of improvement. A key test will be a sovereign bond offering expected from Dubai," said Tim Fox, the chief economist at Emirates NBD. Despite expectations of significant investor appetite for the planned bond sale, concerns about the ability of some Dubai-related entities to service their debt remain.

Yesterday, the ratings agency Standard & Poor's lowered its long-term rating on Jebel Ali Free Zone to "B" from "B plus", and removed it from negative credit watch.

* with additional reporting by Gregor Stuart Hunter and Angela Giuffrida