Dubai World soothes debt market

Prospect for deal by conglomerate may spur new issuance.

Bond prices in Dubai are inching upwards and perceptions of risk are mellowing as Dubai World nears an agreement with creditors on a US$23.5 billion (Dh86.31bn) debt restructuring. That could pave the way for a revival in long-stagnant regional debt markets. As yields have fallen, an HSBC index of bond returns issued by Dubai-based companies has climbed by about 17 per cent since the beginning of the year, according to Bloomberg data. Higher prices and declining bond yields reflect stronger investor confidence.

"I think the stability in the marketplace has more to do with global markets behaving a little better in June than in May," said Abdul Kadir Hussain, the chief executive of Mashreq Capital, which manages a fund that invests in Islamic bonds, or sukuk. Yet despite a global market outlook that remains far from certain, Jamil Hallak, the head of credit trading at Deutsche Bank for the MENA region, yesterday predicted even lower yields on regional debt in the months to come. He said the yield on a 10-year, £500 million (Dh2.75bn) bond from Dubai Holding Commercial Operations Group could decline by almost 4 percentage points this year, while a $1.5bn DP World bond could see its yield fall by 2 percentage points as investors draw confidence from a Dubai World debt restructuring.

Dubai World, the government-owned conglomerate that counts the property developer Nakheel among its subsidiaries, last month reached a restructuring deal with a panel of seven banks representing 97 creditors. Though the restructuring of $14.4bn in bank debt has yet to be completed, the cost of insuring Dubai sovereign debt against default has fallen since Dubai World first circulated proposals earlier this year. Dubai credit default swaps, which measure perceptions of default risk, have fallen by 26 per cent since February.

While recent signs from the markets have been positive, Ziad Shaaban, the head of fixed income at EFG-Hermes in Dubai, said he did not share Mr Hallak's rosy prediction of further declines in yields. There were too many risks in the global economy, he said - including the European debt crisis and potential political instability in the Middle East - to make bold predictions of calmer markets. "I don't see that happening now and I don't see that happening in the short term, in the next three to six months," he said. "You don't have stability in the region and globally pushing yields down. You still have pressures from Europe and the Dubai World stuff that still has to be worked out."

Mr Hussain said a key concern looking forward was whether lower yields would prompt companies and governments to ponder issuing new debt. Low yields tend to encourage companies to raise money through bonds and sukuk as investors demand smaller interest rates. There have been a few major bond issues recently, including $750m raised this week by Bahrain's sovereign fund, but regional sukuk issuance has been relatively dry.

"The big question continues to be new issuance," Mr Hussain said. "We don't see any new issuers tapping the market just yet. Whether that's because we need to have completion of the Dubai World situation or whether it's just general market slowness I'm not sure, but the bottom line is you can't confidently predict a bright outlook for the sukuk market until there are issuances." There are at least a few signs that activity may pick up after what most observers agree has been a lacklustre year for Islamic debt in the Gulf. Companies and governments in the GCC have raised only $2.47bn through sukuk so far this year, according to Bloomberg, a fall of about 13 per cent from the same period last year.