Dubai plans to sell 10-year dollar-denominated Islamic bonds as the Arabian Gulf emirate takes advantage of tumbling borrowing costs, according to three people familiar with the matter.
The benchmark-sized sukuk may price to yield at the low 4 per cent range, according to the people, who asked not to be named because the details are private. The size of benchmark bonds is typically at least $500 million.
The issuance will be the first sovereign sukuk sale in the six-nation Gulf Cooperation Council this year, according to data compiled by Bloomberg. Sales of bonds that comply with Islam's ban on interest surged to a record $21 billion in the region last year as borrowing costs plunged. The yield on Dubai's 6.396 per cent sukuk due in 2014 tumbled 344 basis points, or 3.44 percentage points, in 2012 to 2.13 per cent, the data show.
"Investors' perception for Dubai credit risk has improved significantly in 2012 and the strong risk-on momentum continues into 2013," Apostolos Bantis, a credit analyst at Commerzbank AG in London, said yesterday. "Despite the improved sentiment for Dubai's credit story the emirate has high refinancing needs and taking advantage of the current low-rates environment is a very good strategy."
Dubai, the second-biggest sheikhdom in the United Arab Emirates, went on a borrowing binge to turn itself into a regional hub for commerce, transport and financial services, before teetering on the brink of default in 2009. The emirate's credit risk dropped more than peers in the Middle East last year as state-linked companies paid and restructured debt.
The cost of insuring the emirate's unrated bonds for five years has retreated 14 basis points this month to 211 on January 18, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The government hired HSBC Holdings, Standard Chartered, Emirates NBD, Dubai Islamic Bank and National Bank of Abu Dhabi to arrange the sale, the people said.
The government's last bond issuance was in April, when it sold $1.25 billion of sukuk in two tranches, including $600 million of five-year notes at a coupon of 4.9 per cent. It also raised $650 million of 10-year bonds at a 6.45 per cent coupon. The offering secured $4.5 billion in bids.
Dubai plans to create an Islamic finance council to regulate equity and fixed-income products as it seeks to become a hub for the industry, taking on centers such Bahrain and Malaysia, home to the world's biggest sukuk market. Islamic finance will become one of the economy's "core" industries, the government said this month.
The premium investors demand to own Dubai's bonds over Malaysia's 3.928 per cent Shariah-compliant notes due June 2015 narrowed five basis points this month to 75 as of January 18.