New Dubai loans push borrowing to $32.5bn

CAPITAL NEEDS: Dubai Inc.'s. borrowing needs have increased nearly fourfold in 2008 to $32.5 billion. (Getty Images)

The government of Dubai is raising a further $16.5 billion of loans for its commercial subsidiaries in the syndicated loan market and is turning to European and Asian lenders to counter a lack of liquidity among local banks, banking sources said.

The government-owned entities - known in the loan market as Dubai Inc - will bring state-backed borrowing to $32.5 billion this year, as the emirate has already completed $16 billion of loans in 2008, according to newswire Reuters subsidiary Loan Pricing Corp data.

Sovereign-backed Dubai World unit Port & Free Zone World, Dubai Financial, Dubai Holding, Dubai Drydocks, Dubai Aerospace Enterprise, Palm District Cooling and DIFC Investments are currently syndicating $9.1 billion of loans in the market.

In addition, state-owned Investment Corporation of Dubai (ICD) is in talks with lenders for a $6 billion syndicated loan and Nakheel Group, developer of the palm-shaped islands off Dubai's coast, is agreeing a $1.3 billion loan, a banking source said.

The $32.5 billion of loans planned for the year so far dwarfs Dubai's government-linked borrowing of $9.3 billion for the whole of 2007, according to RLPC data.

The loans are relying on European and Asian bank liquidity as regional Gulf lenders are struggling with increased funding costs and limited access to dollar funds stemming from uncertainty over the dollar peg to local currencies.

"There is no liquidity in the Middle East," a banker said.

Loans are now being structured to incorporate tranches in regional currencies, particularly in UAE dirhams, but regional bank participation has been limited even on this basis and loans continue to rely on foreign bank participation.

Dubai World's recent $5.5 billion loan was arranged by seven banks from Europe and Asia together with two Gulf banks. The deal allowed commitments in dirhams but only 22 percent of the loan was committed in local currency.
European and Asian banks are keen to be involved in Dubai Inc's loans, which offer a good yield compared to western European counterparts, several bankers said.

"Pricing available in the Middle East is more attractive to western and Asian lenders than similar rated firms in their own regions," a second banker said.

"Strong growth in the Gulf means that [western and Asian] banks have increased their exposure to the region," he added.

Pricing loans in the Gulf is difficult as lenders' margin expectations have risen considerably, bankers said, and are being priced to available liquidity rather than borrowers' credit risk.

"Pricing benchmarks are temporary. If the previous deal was priced at 175 [basis points], then the next one needs to be higher," the second banker said.

Bankers say there have been several instances of banks underwriting loans, then increasing pricing before launching the deal to syndication after getting cold feet.

Shorter maturities and larger mandated lead arranger groups are other features of recent loans for Gulf borrowers as these minimise banks' overall risk by keeping lending short-term, market risk by speeding the selldown process and syndication risk by reducing the amount needed to be raised in syndication. (Reuters)

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No liquidity???
Posted by SR, Dubai on Saturday 2 August 2008 at 09:26 UAE time

This is the first time I am hearing this, "there is no liquidity in the market". I thought that was the entirely opposite, with inflation, low interest rates, banks trying to sell consumer loans etc. Moreover, what with SVFs bailing US banks, buying properties elsewhere etc etc.
Whoever the banker commented need to do some serious rethinking!
I feel that the actual case is that UAE wants to borrow in USD which is cheap in the market and the currency is weak. There is a strong possibility that UAE will depeg in the short term, in which case the AED will strengthen against the USD. Result - Dubai Inc will be left with a borrowing in a relatively weak currency which is good as the repayment will be cheaper!! (I feel there is a real possibility!).

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