Bonding time

Dubai is looking to borrow another $10bn to refinance its debt in the wake of a sharp economic downturn. But who's buying?
Bonding time
By Alex Delmar-Morgan
Fri 31 Jul 2009 04:00 AM

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.He argues that if the Dubai government identified companies which had received support, investors would be reassured.

“A lot of the reluctance that you have in the market from investors to buy into Dubai at the moment stems from that lack of transparency,” he says.

“If you produced clear transparent criteria on what companies are regarded as strategic and worthy of support and which ones aren’t, that would give investors the clear choice of which companies to buy into and which not to.”

Transparency aside, the benefits from the first $10bn appear to be filtering through. Lotter says there is increased liquidity and clear evidence that companies are paying off debt, while Riley reports that projects in places like Business Bay are now moving ahead faster.

Dubai’s debt has been accumulated on the back of an ambitious plan to rapidly diversify the economy and to create an economic centre fit to attract the world’s biggest and best commercial enterprises. But Lotter says the widely quoted $80bn figure is misleading.

“It’s not wrong, but it implies this $80bn will need support tomorrow,” he points out.

“A lot of the $80bn is long-term and is from companies that are generating revenues and cashflows and are capable of supporting themselves. The vast majority of Dubai is self-sufficient and, at least currently, is in no need of support,” he says.

He cites ports operator DP World as a company with good cashflow and revenues. In March, Dubai Electricity and Water Authority (DEWA) refinanced a $2.2bn (AED8bn) Islamic loan early.

However, the big question on every experts’ lips is whether Dubai will look to raise more debt to stave off the effects of the global crisis.

Woertz at the Gulf Research Centre stresses that the $20bn rescue package to Dubai’s stricken state-linked companies will ultimately have to stimulate organic growth in the corporate sector, if Dubai is to recover.

“The big news is that Abu Dhabi steps in, gives $20bn, and that will help Dubai refinance outstanding debt and to get contractors paid but, in the long term, Dubai companies will need to make profits and generate cash-flow in order to repay that debt at some point,” he says.

But all eyes will now focus on how the money from the bond programme will be deployed. An independent agency has been set up to manage the funds.

In charge of how much money is given to whom, and when, will be the five man Supreme Fiscal Committee, of which Al Saleh is a member and Shaikh Ahmed Al Maktoum, boss of Emirates airline and uncle of Dubai’s ruler, is chairman.

“I think over the summer there will be a significant amount of pain to come,” says Nomura’s Riley.

“I think the government will be selective as to where that money goes, who remains solvent and who doesn’t remain solvent.”

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