Gulf issues leading bond markets

Gulf bond sales accelerate faster than anywhere in the world as investors buy sovereign and corporate debt from the Emirates.

Nakheel, the developer of the Palm islands in Dubai, is expected to repay its $4.1 billion bond repayment next month.

Gulf bond sales are accelerating at a faster rate than anywhere in the world as international investors buy sovereign and corporate debt from the Emirates, a senior Bank of America Merrill Lynch economist says. Returning appetite for Dubai debt is also expected to be given a boost by the anticipated repayment by Nakheel of US$4.1 billion (Dh15.06bn) in bond principal and profit by Nakheel next month. The bond reached a record this week on expectations that it would be repaid in full.

"We have an excess of demand because we do not have that many sovereign issuances [of debt from the Gulf], so there is a good appetite for either quasi-sovereign companies or sovereign issuances, and it is going to carry on," said Turker Hamzaoglu of BofA Merrill Lynch. "We've had more than $30bn of issuances so far [this year] and the UAE accounts for a big chunk of that." Several countries in the Gulf, including Qatar and the UAE, have raised money this year through conventional and Islamic bonds to finance development and repay old debts. Dubai courted international investors last month to raise up to $6.5bn in a new bond programme, and Abu Dhabi floated a $10bn programme in March this year.

That activity came during a slow period for global bond issuances, which helped the GCC take centre stage in fund-raising through bonds this year, Mr Hamzaoglu said. "The good point is that the GCC is the only region where net issuances are increasing compared to last year," he said. Observers have been paying special attention to Dubai and its government-controlled companies, which are estimated to owe $85bn to financial institutions and bond investors around the world, much of which comes due in the next three years.

In addition to raising money through international bonds, Dubai has launched the $20bn Dubai Financial Support Fund to help stabilise government-controlled companies affected by the financial crisis. The emirate raised the first half of the money through a bond issued to the Central Bank. Despite the Dubai debt load, Mr Hamzaoglu pointed to narrowing spreads on credit-default swaps, which measure the cost of insuring against the non-payment of debt, as a sign that perceptions about the creditworthiness of the emirate are improving. He also pointed to recent repayments of bonds, including a $1bn Dubai Civil Aviation Islamic bond that came due last week, as further fuel for confidence among investors.

"There has been great improvement, and the proof of the pudding is the refunding of many maturing debts," he said. "Most of the funding has been refinanced and the recent [Islamic bond] issuance I think is also well perceived." Nakheel, the developer of the signature Palm islands in Dubai, said yesterday it was talking to its parent about the upcoming $4.1bn repayment for its Islamic bond due on December 14. The bond is widely seen as a litmus tests for the ability of Dubai to repay its outstanding debt burden.

Dubai surprised the market when it issued $1.93bn in Islamic bonds two weeks ago, the first such issue since the financial crisis hit. It was several times oversubscribed. "There has been a shift in sentiment," said Chavan Bhogaita, the head of credit research at National Bank of Abu Dhabi. "The long-standing assumption that the outcome would be bad for bondholders has changed. On a broad basis, investor sentiment now is that the outcome will be positive for bondholders."

Some observers expect the Government to either fully repay the bonds or offer investors the option of extending the maturity in return for additional coupons. "The Government will definitely make a big show out of fully repaying foreign investors, while they will try to build on the goodwill of the local investors who have already made money off the bonds," said a banker who did not want to be named.

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