Dubai creditworthiness still fragile in eyes of investors

Dubai's move to sweeten its recent bond issue highlights the emirate's weak spots, says Una Galani
Dubai creditworthiness still fragile in eyes of investors
(Getty Images)
By Reuters
Wed 15 Jun 2011 05:18 PM

Is Dubai really a safe haven? The emirate will try to take advantage of the contrast between the Arab unrest and its financial recovery, with the launch of a 10-year dollar bond, its second sovereign issue since its own debt crisis began in late 2009. But on some measures, indebted Dubai remains only marginally more creditworthy than some of its prickly neighbours.

Dubai is in better shape than it was. With a lifeline from Abu Dhabi, the government has agreed a restructuring for flagship conglomerate Dubai World. Hotel occupancy rose between January and March this year, according to HSBC, with visitors escaping less stable climes. New export orders have also continued to rise over the period.

But Dubai's move to sweeten its latest sovereign issue highlights the emirate's weak spots. A five-year put will give bondholders the option to redeem their debt at face value before the final maturity date. Final terms haven't been disclosed, but the extra guarantee should enable Dubai to secure a lower cost of borrowing, nearer to that of a five-year bond.

Cost-cutting is welcome. But the option will also add to uncertainty about when the emirate's debts are due. The government's total direct debt is around $31bn. But if quasi-sovereign entities are included, Dubai could be on the hook for over $111bn  or over 130 percent of nominal GDP in 2010. A little less than one third of the total is due this year and next. And a further $25bn-plus is maturing in 2014, according to estimates made by Credit Suisse at the start of the year.

Restructuring has given Dubai breathing space but it hasn't addressed concerns about the absolute size of its debt load. And there is little sign of action on that front. The emirate still doesn't have a credit rating, and no asset sales are on the agenda. Nor are plans to implement income or corporate taxes.

Judging by demand for Dubai's previous sovereign issue, the emirate won't struggle to find buyers. High oil prices generate plenty of cash looking for a home. But at around 300 basis points, credit default swaps suggest Dubai is only slightly less risky than Lebanon or post-revolutionary Egypt.

The CDSs of true safe havens like Abu Dhabi and Qatar trade at only a fraction of that amount.

(Una Galani is a Reuters Breakingviews columnist. The opinions expressed are her own)

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