Dubai passes first debt test but more loom

Timely repayment of a $500m bond owed by a unit of Dubai Holding, owned by the emirate's ruler, will please investors but the focus is on two larger Islamic bonds owed by state-linked firms maturing this year and whether Dubai will step in with financial aid.

The Gulf Arab emirate has clawed its way back from the depths of its crippling 2009 debt crisis, helped by a revival in trade and tourism and its safe-haven status amid the Arab Spring revolts.

But the emirate still faces a massive debt burden, with approximately $15bn in bonds and loans maturing this year alone, according to the International Monetary Fund.

Dubai Holding Commercial Operations Group's (DHCOG), which along with its parent is part of the matrix known as Dubai Inc, on Wednesday announced the full repayment of the bond which was due Feb 1, using its own internal cash flow.

The bigger question centres on two Islamic bonds, worth $3.25bn combined, issued by DIFC Investments (DIFCI), the investment arm of the firm that runs Dubai's financial free zone, and Jebel Ali Free Zone (JAFZA).

"The first test for Dubai will be to meet its [$1.25bn] DIFCI commitment in June but the real test will be JAFZA as it is the largest maturity and at the end of the line - after Dubai will likely have already provided substantial financial assistance to DIFCI," said Ghassan Chehayeb, associate director of Middle East research at Exotix.

Dubai will be loath to tarnish its reputation in debt capital markets and will push state-linked entities to honour traded debt. In 2009, it narrowly averted default on developer Nakheel's Islamic bond after Abu Dhabi threw it a last-minute lifeline. Since then, the emirate has been in recovery mode and issued two well-received government bonds.

"It is essential for Dubai to continue to have a good credit reputation to enable it to continue to access the international markets in future with reasonable borrowing costs," said Mohammed Ali Yasin, chief investment officer at CAPM Investment in Abu Dhabi.

The strategic importance of DIFCI and JAFZA means the state cannot afford to let them fail, and current prices on their sukuk indicate investors are pricing in state support.

DIFCI's $1.25bn Islamic bond maturing in June was seen at 96 levels while JAFZA's November AED7.5bn ($2bn) sukuk was at 94.5 on Wednesday morning. Both have seen a steady recovery from October lows at 87-88 levels amid euro zone debt concerns.

"Although DIFCI and JAFZA have been less transparent than DHCOG in regard to voicing their commitment to creditors, we believe all Dubai public maturities will be honoured in a timely fashion," said Chehayeb.

Among bondholders are hedge funds, high-yield investors and distressed debt players.

Price action as the debt inches closer to maturity will be a key indicator of investor nervousness. Analysts say monetising assets quickly or financial support from the state are key for both entities.

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