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Mon 23 Feb 2009 05:59 PM

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Experts back Dubai's $20bn bond programme

Bank chiefs say move will do much to boost confidence in emirate's financial sector.

Industry experts declared on Monday that the government announcement of a $20 billion sovereign bond programme would do much to boost investor confidence in the emirate.

“The story has changed,” said Abdul Kadir Hussain, chief executive of Mashreq Capital.

The sale of $10 billion in bonds by Dubai to the UAE central bank appeared to answer a lot of the market’s questions over the emirate’s ability to refinance its debt, which the government has estimated to stand at around $80 billion, he said.

“I think you will see that what we saw in the bond markets these last weeks marked the bottom,” Hussain added.

His views were echoed by the chief executive of Dubai Bank, the Islamic bank owned by the Dubai Group.

“The subscription of the UAE central bank to the first issuance of $10 billion is...a clear demonstration of the UAE’s unified and timely response to the global financial crisis,” he said.

Hussain cautioned that private investors would be unlikely to take up deals on the remaining $10 billion under the same terms of the fixed interest of four percent per year on the five-year bonds purchased by the central bank.

But the overriding sense among market observers was one of relief.

Even if the remaining $10 billion never hits the bond market, the show of support from the central bank, in which oil rich Abu Dhabi is a majority stakeholder, is likely to open up other avenues of funding for Dubai, experts said.

“The launch of the Dubai bonds is another move by the government to assure the markets that the emirates are working together,” a team of economists at Standard Chartered wrote in a research note.

“The bond issuance, with $10 billion already purchased by the central bank, gives Dubai the ability to refund all its needs for this year, which we estimate at $14 billion. We expect markets to respond positively.”

Philipp Lotter, a Moody’s analyst who put six Dubai Inc companies on ratings watch negative earlier this month, said that the materialisation of government support could be positive from a ratings perspective.

“Our ongoing ratings review, which is expected to be concluded shortly, will consider to what degree the erosion of Dubai's intrinsic economic strength and the fundamental creditworthiness of each of the six rated Dubai Inc companies is offset by the materialisation of financial support from the federal government,” he said.

The cost of credit default swaps on Dubai government debt fell to 733 basis points from 898 on Friday, according to data from CMA Datavision obtained by Bloomberg.

Credit default swaps are contracts that protect the buyer of a bond from the issuer defaulting.

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Andy 11 years ago

This is great news and a great move on behalf of the local government during these times. On the other hand, I feel that this $10 Billion is insufficient and time will show in the near term. I think Dubai requires a lot more than just $10 Billion.

Jebel Ali Baba 11 years ago

I don't agree that the bond programme boosts confidence of investors. For me it was a shock to learn that the Dubai Government has US$80 billion debt and now they are issueing a financing scheme to pay current and future projects. So the only one which can be confident are the companies involved into these projects. Investors need much more to be re-attracted.