Dubai’s economy has been showing signs of revival, with property prices recovering and an increasingly bullish investor sentiment on the back of improving trade flows with Asia, increased tourism and its safe-haven status amid political concerns in neighboring Arab countries. However, out of the projected US$100 billion- worth of Sukuk issuances expected to originate from the Gulf this year, issuances out of the UAE are not expected to constitute a major chunk.
Last month, the Government of Dubai raised US$1.25 billion worth of Sukuk in two five and ten-year tranches, with proceeds from the bond sale providing sufficient liquidity to fund the government’s budget deficit and refinancing plans. This was the first time the UAE government tested the credit markets since June 2011, when it issued a ten-year bond worth US$500 million; attracting orders over US$1.8 billion.
The newly issued bonds were over-subscribed by more than three and a half times, and gained a tight pricing at 4.9% and 6.45% respectively for the five and ten-year bonds. However, the government clarified that none of the proceeds would be used to refinance the debt of Jebel Ali Free Zone and DIFC Investments, according to Mohammed Al Shaibani, the director general of the Dubai ruler’s court. Both entities currently represent the largest restructuring exercises in the emirates this year, worth a combined US$3.25 billion. Other debt due to mature according to the MENA Bond and Sukuk list include EIB Sukuk’s US$350 million Sukuk Musharakah and Dubai Sukuk Center’s US$1.25 billion Sukuk Mudarabah.
According to a Dubai-based lawyer, the majority of work in the UAE currently constitutes restructuring and refinancing, with a minimal quantity of Sukuk in the pipeline: although this does include Emirates NBD’s planned US$500 million issuance this year, and Dubai Investment’s potential issuance worth US$200 million to finance the expansion of its second production line at its Emirates Float Glass Factory in Abu Dhabi.
Rating agency Standard & Poor’s also recently warned that it may cut the credit rating of DIFC Investments due to “heightened refinancing risk” on its US$1.25 billion Sukuk due in June. In a report, the rating agency stated: “DIFC Investments has little room for delays in its efforts to secure a bank loan and government support to refinance the Sukuk”, placing its ‘B+’ long-term and ‘B’ short-term ratings on Creditwatch with a negative outlook. DIFC Investments, which is controlled by the Dubai government, is a high-risk situation considering Nakheel’s Sukuk defaults in 2009, and could potentially create another round of bad PR for Dubai despite its recovering economic situation and improving real estate sales and pricing. As always however, it is a game of wait-and-see, and should the emirate pass the acid test of restructuring and refinancing of its debt due this year, it is expected that Sukuk issuances could regain momentum in the country. — NH