Investors appear optimistic UAE emirate can arrange smooth refinancing for state-owned firms
A year-end rally in Dubai-related bonds sends a positive signal for 2012, suggesting more investors are becoming convinced the emirate can arrange smooth refinancing for state-owned firms next year. But there are still major doubts.
Government-related entities in Dubai have bonds worth $3.8bn maturing in 2012. With the real estate market still sagging, the stock market moribund and many banks reluctant to lend because of global financial instability, investors have worried that some of those bonds might be restructured, with changes to repayment terms that disadvantage creditors.
Such speculation prompted HH Sheikh Ahmed bin Saeed Al Maktoum, chairman of the Dubai Supreme Fiscal Committee, to declare on Dec 7 that restructuring was not on the cards, though he said the government might look into refinancing part of the debts, presumably through issuing new bonds or loans.
"There is no truth to reports being circulated about an intention to 'restructure' certain debts owed by the Dubai government companies in 2012," Sheikh Ahmed said.
The ensuing slide in bond yields for all three of the companies with debt maturing next year shows the Dubai government still commands a substantial amount of trust in the market, partly because a critical mass of investors is convinced that Abu Dhabi will provide further financial support if that proves necessary.
"We have seen some positives...Names such as JAFZA have seen buyers. That goes for all Dubai HY [high yield] recently," said a Dubai-based fixed income trader.
Dubai credits have outperformed many high-grade bonds in the UAE as the year draws to a close. The yield on Jebel Ali Free Zone's (JAFZA) AED7.5bn ($2bn) sukuk maturing in November has dropped from 13.50 percent on Dec 6 to 12.19 percent. Standard & Poor's has identified the JAFZA issue as among the Dubai obligations in 2012 with the greatest chance of encountering repayment issues.
JAFZA's chairman said this month that the company was confident it could refinance the sukuk without government aid and was already in talks with bondholders about that. He did not rule out asset sales to raise funds.
DIFC Investments' 0.713 percent, $1.25bn sukuk comes due in June. Its yield has dropped from 19.32 percent on Dec. 6 to 16.57 percent.
The third Dubai company with debt maturing next year, Dubai Holding Commercial Operations Group, a unit of the conglomerate owned by the ruler, has said it will repay in full and on time its 0.804 percent, $500m bond maturing in February. The yield on that is at 16.22 percent, down from 18.07 percent on Dec. 6.
The Dubai sovereign has also benefitted; the yield on the$750m, 7.75 percent 2020 bond has dropped about 35 basis points.
By contrast, the yield on a top Abu Dhabi credit, Abu Dhabi National Energy Co's (TAQA) 5.62 percent, October 2012 bond, has risen to 2.23 percent from around 2.10 percent since Dec 6.
The origins of the Dubai rally are more complex than simple optimism about refinancings, however. Thin trading turnover at the year-end may to some extent have distorted prices.
"We saw better buyers on thin liquidity, which has driven prices up more than usual," the Dubai trader said.
A sudden halt in new bond supply, after TAQA's $1.5bn issue in early December, may also have boosted prices. Several UAE companies including some from Dubai were originally looking to issue after TAQA but did not proceed as the year-end issuance window closed.
In addition, Dubai bonds' trading levels are in some cases less impressive than they might seem. DIFC Investments' bond yield was at 14.52 percent at the start of December before a burst of speculation about a possible restructuring pushed it up sharply. The bond has still not recouped all the losses caused by that speculation.
In price terms, DIFCI is trading at 93.20 bid and JAFZA at 93.75 bid - levels that still suggest considerable concern about the terms on which the bonds may be retired.
One source of concern is the fact that some Dubai companies are still struggling to negotiate terms for restructuring their syndicated loans. As long as these deals have not been done, the market may worry about Dubai's ability to repay bonds in full and on time.
One restructuring effort which is struggling is that of Dubai Group. When it announced it needed to renegotiate its debts last year, the company said it would continue to service them. But Dubai Group has not paid interest on $10bn of debt for over a year, sources involved in the restructuring said in November. Dubai Group expects to provide further details of its efforts in coming months, a spokeswoman said.
Drydocks World, a unit of Dubai World, expects to complete its long-delayed debt restructuring by the end of March 2012, its chairman said this week.
David Staples, managing director for EMEA corporate finance at Moody's Investors Service, said the government of Dubai was willing to support its related entities financially but might not have the capacity to do so.
For these reasons, Dubai bonds' discounts to par may not close completely until the companies or the government indicate much more clearly how they intend to avoid restructurings.
"The government's announcements were positive for sentiment but as always, the market wants details," another trader said.