Dubai gov't launches $20bn bond issue

The government of Dubai launched a $20bn sovereign bond programme on Sunday to ease tight liquidity conditions, saying the UAE Central Bank had subscribed to half of the issue.

The bonds "will secure the necessary funding for Dubai to meet its financial obligations and continue its development programme," the emirate, one of seven members in the UAE federation, said in a statement.

The five-year bonds would pay a fixed four percent interest per year, it said, but did not give a date for the issuance of the rest of the bonds or say who would be eligible to buy.

Dubai's mostly government-linked issuers will have to refinance about $15bn in 2009, Moody's Investors Service said earlier this month.

Dubai's move to sell $10 billion in bonds to the UAE central bank alleviated worries it could default as investors bet the state would step in again to help the former boom town weather the downturn.

Dubai stocks jumped almost eight percent on Monday and the cost of insuring its debt fell sharply off peaks earlier this month that saw credit default swaps (CDS) for some Dubai-linked companies soar to levels exceeding those of crisis-hit Iceland.

"The UAE is making clear it is able and willing to provide support as and when it is needed," said Simon Williams, regional economist at HSBC.

"Dubai's economy will still slow sharply this year. Credit markets will remain tight and export markets are weak but this is a crucial step to put a floor under the near-term downturn."

Facing a real estate slump that has led to thousands of job cuts, hundreds of billions of dollars in project cancellations and raised concerns about bank asset quality, Dubai needed quick access to funds to refinance $15-20 billion in debt this year.

But global banks have been loath to lend a hand. Stock exchange company Borse Dubai struggled last week to refinance $3.4 billion from banks, forcing the emirate to turn to a state-owned investment company for the lion's share of funding.

In a clear signal the UAE government won't leave Dubai to grapple with the crisis alone, Dubai launched a $20 billion bond programme and said it would sell at least half to the central bank of the seven-member federation that includes Abu Dhabi.

"We took out the uncertainty that was weighing on Dubai," said Raed Safadi, chief economist for the Dubai government. "Businesses can now get on their operations."

Analysts were reluctant to term the move a bailout as the plan involved giving debt to the central bank - albeit at a subsidised rate of 4 percent annually - rather than equity.

They were also sceptical on how much appetite there would be on the public market for the remaining bonds, given the low yields.

Credit and equity markets reacted positively to the news.

The cost of insuring Dubai sovereign debt with CDS fell to about $750,000 per $10 million of five year debt - down from between $920,000 and $950,000 on Sunday, three bankers said.

Dubai's stock benchmark DFM, which suffered a 72-percent plunge last year, advanced 7.91 percent.

Bellwether stock Emaar Properties soared 13.2 percent on news of the bond issue and a statement that it did not expect any further significant impact on its first-quarter results from the bankruptcy of its US unit John Laing Homes.

"The market was pricing in a Dubai bankruptcy, which was never the case," said Rami Sidani, head of investment for the Middle East and North Africa at Schroders Middle East.

"Dubai is getting proper support from the federation as it has a vital economic presence in the UAE. The UAE has the reserves and oil surplus to be used in a rainy day, which is what we are going through today."

But analysts said $20 billion was not enough to meet economic challenges facing Dubai, which threw itself onto the world stage by building the world's tallest tower, as well as islands shaped as palm fronds and the world map.

Property prices in the Gulf trade and tourism hub have fallen at least a quarter from a 2008 peak, while banks take heavy provisions for bad loans and writedown investment losses.

The finance ministry and central bank had launched 120 billion dirhams of funding facilities to help banks cope, but interbank rates remain stubbornly high, slipping about three basis points to 3.06875 percent on Monday.

"We probably will see more response to help the economy," said Marios Maratheftis, regional head of research at Standard Chartered Bank, which has urged the government to inject about 110 billion dihrams into deposits at banks to restore lending.

"I think what the economy needs is to provide it with liquidity so we can start seeing credit growth and so we can see the economy stand back on its feet."

Meanwhile, the UAE central bank could use the Dubai debt to help develop the tools it uses to control monetary policy in a country that pegs its currency to the US dollar, constraining its ability to intervene with the markets.

"The central bank can now buy and sell government securities to the banking system to control liquidity," said Nasser Saidi, chief economist at the Dubai International Financial Centre.

"We also need to jumpstart the private sector corporate debt market. Until you create a sovereign benchmark then corporates don't know how to price themselves." (Reuters)