Business

Global investor confidence on the rise over Dubai debt

The cost of insuring Dubai's debt has dropped by almost half since 2009, reflecting the progress the emirate has made to cut its debt pile.

Tom Arnold

April 10, 2012

The cost of insuring Dubai's debt against default has dropped by almost half since the peak of a crisis in 2009 as recent restructuring progress and a more positive global outlook cheer investors.

It reflects a growing faith in the emirate's ability to repay debts falling due this year.

"It's a positive sign in terms of global investor faith in Dubai," said Nick Stadtmiller, the head of fixed income research at Emirates NBD. "Going into this year there were important debt maturities coming up, particularly Jebel Ali Free Zone and DIFC Investments, and it seems progress is being made through talks ahead of repayment."

Dubai's five-year credit default swaps have narrowed to 340 basis points, after shedding 110 basis points in the year to date to reach their lowest since early August.

It is a long way from the days after Dubai World announced in November 2009 it was seeking to restructure almost US$25 billion (Dh91.8bn) in debt, when the cost of insuring the emirate's debt rocketed to 650 basis points.

The conglomerate successfully restructured its debt last year. Dubai Holding Commercial Operations repaid a $500 million bond that matured in February.

Two further developments have emerged this month. Dubai International Capital, the investment arm of Dubai Holding, clinched a deal with creditors to restructure $2.5bn of loans, it said last week. Meanwhile, Drydocks World has applied for insolvency protection at the Dubai World Tribunal as it attempts to finalise a $2.5bn debt restructuring plan.

Investors are also quietly confident of DIFC Investments' ability to repay a $1.25bn sukuk due in June and a successful outcome to the maturing in November of Jebel Ali Free Zone's $2bn sukuk.

"We believe the outlook for the possible repayment of the remaining two bonds coming due this year is favourable," Farouk Soussa, an economist at Citigroup, wrote in a research report last month.

Confidence has been underpinned by a belief that the Dubai Government will not allow any state-linked firms to fall short on obligations this year.

In December, Sheikh Ahmed Al Maktoum, the head of the Supreme Fiscal Committee, said the Government had no intention to restructure bonds this year.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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