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Sat 7 Nov 2009 04:00 AM

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Dubai’s debt move

Investors anxiously await the fate of Nakheel’s $3.5bn sukuk, & the next installment of Dubai’s $10bn bailout fund.

Dubai’s debt move
The Dubai government is launching bond roadshows in Europe, Asia and at home in an initiative seen to test investor appetite for fresh financing.
Dubai’s debt move
Economist Eckart Woertz feels that the huge debt maturing in 2010 will be a challenge for Dubai.

Words of confidence from Dubai policymakers may not convince investors anxiously awaiting the fate of Nakheel’s $3.5bn Islamic bond, and the next installment of the emirate’s $10bn bailout fund. Natsuko Waki and John Irish report.

Dubai’s move to repay and restructure some of its $80bn debt and a show of support from policymakers may not be enough to convince sceptical investors that the emirate could pay back its bond obligations.

Successful debt restructuring is essential to prevent the debt-laden Dubai — already bailed out by the federal government once — from defaulting and cutting off overseas financing channels for the emirate whose six-year oil boom burst last year, causing a big crash in the property market.

Property developer Nakheel, part of state-owned conglomerate Dubai World, has repaid a $1.2bn securitised bond a month ahead of its maturity date, according to two bankers familiar with the deal.

Furthermore, the Dubai government is launching bond roadshows in Europe, Asia and at home in a move seen to test investor appetite for fresh financing. Dubai International Capital, a subsidiary of Dubai ruler’s investment vehicle, has launched syndication of a $550m loan.

While these developments signal a step in the right direction, the fate of Nakheel’s $3.5bn Islamic bond due in December and Dubai’s upcoming $10bn support bond as well as even more maturing debt next year are the main remaining issues for investors.

“Restructuring will take quite a while. All hinges on how far markets will recover. There is a lot of debt maturing in 2010 and that will be a challenge for Dubai,” said Eckart Woertz, programme manager of economics at Gulf Research Centre.

“They need to find refinancing and try to keep cash generating industries. They will try to reprioritise; where assets and companies are under water you need to try to cut back or they might think about exit strategies.”

Hit by the credit crisis and liquidity crunch, developers in Dubai cancelled or postponed multibillion-dollar construction projects with property prices halving since last year. In prior years Dubai had expanded rapidly its activities in logistics, financial services, property, luxury retail and tourism.

Dubai’s benchmark index rose 1.4 percent on October 19, helped by optimism for Nakheel’s debt restructuring, while prices of Nakheel’s $3.5bn sukuk maturing on December 14 rose to 106 from a low of 103 late last month.

The cost of insuring Dubai’s sovereign bond against default, measured by credit default swaps, stood at around 297 basis points having risen to 943 bps in February.

“They are drumming up interest again. It means people will get to see firsthand and ask questions about what’s happening. It puts Dubai into communication with the market they want to tap in the future and opens the door to look at the books and the numbers irrespective of the outcome,” said Haissam Arabi, CEO of Gulfmena Alternative Investments, a regional hedge fund.

“(But) We still want to see where the (next) $10bn will be subscribed to and the future debt maturing in 2010.”

Policymakers are also sending brighter signals. Dubai’s finance ministry delayed the final $5.5bn cash injection out of its $19.1bn rescue facility as banks do not currently need it, according to a recent newspaper report.

The deputy UAE central bank governor said last week that its upcoming $10bn bond should interest private investors, adding that Dubai has weathered the worst of the economic crisis.

The UAE’s central bank took up the first tranche of the $20bn bond issue in February and Nakheel, which developed Dubai’s palm-shaped islands — has said it received the fund.

“They cannot and do not want to rely solely on Abu Dhabi for their refinance needs. Its pockets are deep but every pocket has a bottom as well,” Woertz said.

“It’s very important to keep credibility and access to international capital markets, so I would expect that bonds and traded debt instruments are all fully and timely paid to send the right signal to the markets. Debts owed to banks might be something different; here negotiations about rescheduling may well happen behind closed doors.”

Earlier this month, HH Sheikh Ahmed Bin Saeed Al Maktoum, member of Dubai’s financial crisis committee, said Dubai would be able to service government debt.

“The sector is surely working hard to digest the developer distress, but liquidity is still a very scarce commodity,” Chet Riley, equity strategist at Nomura, said in a note to clients.

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