Bonding time

Dubai is looking to borrow another $10bn to refinance its debt in the wake of a sharp economic downturn. But mystery still surrounds the debt programme, and where the money goes. Alex Delmar-Morgan reports.

News that dubai has begun raising the second $10bn tranche of its $20bn bond programme has caused no small amount of speculation in the UAE markets. In February, the Central Bank of the UAE agreed to purchase the first $10bn, providing a much needed injection of confidence to the emirate’s financial system in the wake of global crisis. Since then, it was only a question of when the second half of the Dubai’s sovereign bond issuance would be launched.

Abdulrahman Al Saleh, Nasser Al Shaikh’s successor as the new director-general of Dubai’s Department of Finance said the second tranche of bonds would be available to local and international banks to tap into. Not only that, but the newly installed finance chief claimed that, if it needed to, Dubai had the means to raise further debt for struggling government related entities (GREs).

Many analysts, however, are puzzled about how Dubai could raise more debt, especially if it is only to offer an interest rate of four percent on that debt, as is the case with the bond issue.

“Nobody will buy a Dubai bond at four percent — it’s a friendship price, not a market price. It will have to be the central bank or a government institution — it will not be any other market participant,” says Eckart Woertz, programme manager of economics at the Gulf Research Centre.

Philipp Lotter, a Dubai-based credit analyst at rating agency Moody’s, says the likelihood that the UAE central bank will step in again, either by purchasing the bonds or by offering a guarantee, is high.

“Even if the markets are not ready, they [Dubai] will get the money from the UAE central government,” he says.

“There’s been talk about the federal government guaranteeing the bonds which would be interesting. It would allow Dubai to go out and issue the bonds on the market with the explicit and implicit backing of the government. Either way, they will get the money and the funds will flow,” he says.

Certainly, making sure the capital from the bond programme filters through Dubai’s financial system will be paramount. Not only will it provide developers with cashflow to complete unfinished projects, analysts say it will increase liquidity and go some way to repay contractors’ debts. (At the time of writing, almost £400m, or $660m, was owed to UK consultants and engineers alone in unpaid fees from work undertaken in the UAE, according to UK trade body the Association for Consultancy and Engineering.)

Amid the property collapse, where prices have fallen by as much as 45 percent and billions of dollars worth of ambitious projects have either been postponed or cancelled, Dubai has debts of around $80bn, according to official figures.

Experts, though, broadly welcome government intervention to limit the fallout from the economic malaise. However, the lack of details surrounding the bond programme, the dearth of information as to where funds from the first $10bn tranche have gone — and to whom — is worrying, they say.

“People will want to know where they [the funds] have gone, what the investment criteria is and what the commercial terms are that these entities who received the money enter into,” says Chet Riley, a Dubai-based analyst at Japanese investment bank Nomura.

Last month, an in-house interview with the finance department’s Al Saleh was devoid of details about the disbursement of funds from the first $10bn.

“We do not disclose how the funds are disbursed, it’s just like any other commercial terms. We follow certain criteria to allocate the funds, and it all depends on the size of the entity, the project that it involves, with priority given to infrastructure projects that are important to the strategy of the government in the long term,” Al Saleh said at the time.

In May, state owned developer Nakheel confirmed it was receiving funds from the first $10bn, without stating how much. Riley says there is anecdotal evidence that entities such as Dubai Properties has also benefited, citing an uplift in construction activity in Business Bay, where the developer has a large presence.

“Another question that hasn’t been answered yet and would give a lot of comfort to the market if it was answered, is what criteria will the government use to lend support, and what does the government regard as strategically important?” points out Lotter.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Good article
Posted by Mark Flap on Sunday 2 August 2009 at 08:13 UAE time


Good article. Why am I not surprised that Dubai refuses to be transparent, even when it is asking to borrow cash? Any company issuing a bond would have to give some clue of what the money was to be spent on, but Dubai still thinks its brand name is enough to have investors queuing up. And it plans to pay 4% interest? Are they really saying that Dubai carries approx the same risk of default as US Treasury bonds?

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM