By Soren Billing
UPDATE 1: Department of Finance issues statement on Dubai Civil Aviation Authority sukuk.
The Dubai Government has repaid a $1bn Dubai Civil Aviation Authority sukuk that matured on November 4.
“Investment in infrastructure is essential for Dubai’s economic success and the development of our world leading airport facilities central to this strategy,” said the director general of the Department of Finance, Abdulrahman Al Saleh.
Dubai issued a two-tranche, $1.93bn sukuk on October 28 for which 300 investors placed orders in excess of $ 6.3bn equivalent, following a “highly successful” international roadshow, the department said.
The issuance was the biggest Islamic bond sale in the GCC in the year to date, and marked the emirate’s return to the bond market after the region was hit by the international recession last year.
“The achievements and bright prospects of Dubai were recognised by the global investment community on our recent international roadshow where we were delighted by enthusiastic investor appetite and high levels of confidence in the emirate,” said Al Saleh.
Dubai and its government-linked companies have to meet $6.8 billion in debt obligations in the fourth quarter, Frankfurt-based Deutsche Bank AG said in September.
Property developer Nakheel needs to repay Islamic bonds of $3.52 billion in December.
Sukuk are securities that are governed by Shariah laws barring investors from profiting from the exchange of money, as occurs with interest payments on other bonds.
In simple terms here, all that has happened is that more debt has replaced old debt. It may be cheaper debt or it may be more expensive debt, who knows. Usually in a borrowing scenario an entity repays principal and interest, however what seems to be happening in Dubai is that it is rolling over its principal and interest by issuing new debt instruments and compunding its problems. This would be fine if the borrower had future cashflows to eventually repay this debt. What i dont see at the moment is where Dubai is going to generate the positive cashflows that are required to repay AND reduce its debt. How long will it be able to survive without direct taxation of its residents? We are already taxed enormous amounts indirectly so will those stealth taxes rise and rise to start meeting Dubai's debt repayment obligations? What other means can Dubai generate the cashflows it needs to repay debt?