Dubai raised $1.25 billion in 10- year sukuk and its first 30-year bonds as the Persian Gulf emirate took advantage of tumbling borrowing costs, according to six people familiar with the matter.
The government sold $750 million in Islamic bonds at 3.875 percent and $500 million in 30-year notes at 5.375 percent, according to the people, who asked not to be named because the details are private. Dubai last tapped global bond markets in April when it borrowed a similar amount, including $650 million of 10-year sukuk at a 6.45 percent coupon.
Dubai’s borrowing costs have tumbled as the emirate’s economy recovers from the brink of default in 2009. The government plans to more than double economic growth to an average of 4.6 percent through 2015, according to the bond prospectus, compared with 1.75 percent between 2008 and 2011.
“This new deal is proof that Dubai has regained market confidence which has allowed them to bring down their borrowing costs significantly,” said Hakim Azaiez, the head of investment at GCA Asset Management in London. “Dubai pulled themselves out of the crisis with phenomenal momentum.”
The sukuk issuance is the first sovereign sale in the six- nation Gulf Cooperation Council this year, according to data compiled by Bloomberg. Sales of bonds that comply with Islam’s ban on interest surged to a record $21 billion in the region last year as borrowing costs plunged. The yield on Dubai’s 6.396 percent sukuk due in 2014 dropped 344 basis points, or 3.44 percentage points, in 2012 to 2.13 percent, the data show.
“Appetite for Islamic paper is growing exponentially, and sentiment toward Dubai is incredibly positive,” Ghassan Chehayeb, research director for the Middle East and North Africa at Exotix Ltd., said today. “The emirate has significant refinancing needs in 2015/2016, so it is critical that they continue to manage this challenging maturity schedule in advance.”
Dubai, the second-biggest sheikhdom in the United Arab Emirates, raked up $113 billion in debt to turn itself into a regional hub for commerce, transport and financial services, before teetering on the brink of default in 2009. Dubai state- linked maturities, not including restructured loans, amount to about $7 billion this year, almost $32 billion in 2014 and $9.6 billion in 2015, according to Bank of America Merrill Lynch estimates.
The emirate’s credit risk dropped more than peers in the Middle East last year as state-linked companies paid and restructured debt. The cost of insuring the emirate’s unrated bonds for five years has retreated 15 basis points this month to 210 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
“Investor’s perception for Dubai credit risk has improved significantly in 2012 and the strong risk-on momentum continues into 2013,” Apostolos Bantis, a credit analyst at Commerzbank AG in London, said yesterday.
The government hired HSBC Holdings Plc (HSBA), Standard Chartered Plc (STAN), Emirates NBD PJSC (EMIRATES), Dubai Islamic Bank PJSC (DIB) and National Bank of Abu Dhabi PJSC to arrange the sale, the people said.
Dubai plans to create an Islamic finance council to regulate equity and fixed-income products as it seeks to become a hub for the industry, taking on centers such Bahrain and Malaysia, home to the world’s biggest sukuk market. Islamic finance will become one of the economy’s “core” industries, the government said this month.
The premium investors demand to own Dubai’s bonds over Malaysia’s 3.928 percent Shariah-compliant notes due June 2015 narrowed five basis points this month to 75 today.