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Fri 26 Mar 2010 03:40 PM

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Dubai’s debt plan may speed up corporate bond sales

Dubai’s support has given 'a very positive catalyst for Gulf credit' - analyst.

Dubai’s debt plan may speed up corporate bond sales
(Getty Images)

Dubai may revive bond sales after a five-month lull, as plans for restructuring state-owned Dubai World sent the cost of protecting the emirate’s debt against default tumbling the most since December.

Credit default swaps linked to Dubai plunged yesterday after the government said it will provide as much as $9.5 billion for Dubai World, which is seeking to reschedule $23.5 billion of debt. Bonds sold by real-estate unit Nakheel jumped 45 percent as its parent said it will pay creditors in full should banks accept the debt proposal.

Cut off from bond markets since Dubai World said in November it would seek to delay payments, borrowers from Emirates NBD to Dubai Electricity & Water Authority say they may sell debt once the deal is complete. Overseas offerings in the rest of the region are off to the best first quarter since 2007, with more than $3 billion raised from companies such as Banque Saudi Fransi and National Bank of Abu Dhabi, data compiled by Bloomberg show.

Dubai’s support has “provided a very positive catalyst for Gulf credit,” said Chavan Bhogaita, head of credit research at National Bank of Abu Dhabi, the United Arab Emirates second- biggest bank by assets. “In the secondary markets, we have seen a strong rally in Dubai credits, and on the primary side I would expect to have positive implications for the ability of Dubai- based issuers to access the debt capital markets.”

Dubai credit default swaps fell 53.8 basis points to 368.9 basis points as of 8:30 a.m. yesterday in London and closed at 402.9, according to CMA DataVision prices. The contracts, which pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent, traded at 405.7 basis points as of 8:35 a.m. today. A basis point equals $1,000 a year on a contract protecting $10 million of debt.

Investors should sell credit default swaps linked to Dubai’s government because the restructuring of Dubai World’s debt poses “no sovereign risk,” JPMorgan Chase & Co.’s Brahim Razgallah wrote in a research report dated today.

Nakheel’s $750 million Islamic bond, or sukuk, maturing in January rose 29.5 cents to 94.375 cents on the dollar yesterday, according to prices on Bloomberg. The builder of palm-shaped islands off Dubai’s coast has two bond issues worth $1.73 billion outstanding.

Dubai Electricity and Water Authority, a state-owned utility, may raise $1 billion to $1.5 billion in the second quarter by selling bonds, Chief Executive Officer Saeed Mohammad Al Tayer said earlier this month. The Dubai government’s $1.93 billion Islamic bond issued in October was the last sale of bonds from the emirate.

Emirates NBD, the biggest bank in Dubai, plans to tap the debt market after the restructuring is complete, Chairman Ahmed Bin Humaid Al Tayer said.

“Let’s watch the market, we are not in a hurry,” Emirates NBD’s Al Tayer said in a phone interview yesterday. “There is a clearer picture of the future, it gives more confidence to the U.A.E. and the banking sector.”

The additional restructuring funds double to $20 billion the amount the government paid to Dubai World, which will ask creditors to wait up to eight years to get all their money back. The company said in November it would seek to delay repaying debt until May, sparking a plunge in developing-nation stocks and doubling the cost to protect against a default by Dubai.

Debt sales from the Gulf this quarter were led by Saudi Arabia-based Banque Saudi Fransi and the state-owned National Bank of Abu Dhabi.

National Bank sold $750 million of 4.25 percent notes due in 2015 last week to yield 1.78 percentage points more than the benchmark swap rate. That’s 12 basis points less than the 1.90 percentage points over swaps it paid when it issued $850 million of five-year notes in September. Investors demanded more than five times the amount sold, said Bhogaita. A basis point is 0.01 percentage point.

“What we can assume is that the next leg of issuance will be from strong corporate names and banks from the region,” said Nish Popat, head of fixed-income at ING Investment Management Dubai Ltd.

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