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Dubai's $10bn bond plan leaves investors wary.

Byline: Dubai

Foreign investors are unlikely to tap into a $10 billion Dubai bond unless officials give details such as whether it has federal backing, raising the prospect the central government may intervene again to support the emirate.

Dubai propelled itself into the spotlight as a tourism hub during a six-year oil-fuelled boom, but the downturn rocked its foundations based on excess lending and a transient expatriate population.

The UAE's central bank took up the first tranche of a $20 billion bond issue in February and Dubai's new finance chief announced last week that the second tranche would be open to local and foreign investors.

'Investors in the region know this $10 billion will be used to support infrastructure and liquidity of government related entities (GREs),' said Nish Popat, ING's head of fixed income in the Middle East. 'But will it be $10 billion? Will there be a federal guarantee? Will there be a rating, and if so will there be greater transparency in finances of the country?

'There are more questions than answers for investors.'

The UAE, and Dubai in particular, has been hit hard by the downturn. Construction projects were cancelled or postponed after the global credit crunch robbed developers of access to cheap finance while a slump in oil prices slashed state revenues across the region.

The emirate will not identify firms who receive help, leaving it up to each entity to disclose its dealings.

'The reality is Dubai still has significant measures to take in order to tap financial markets independently,' said Mohieddine Kronfol, managing director at Dubai-based fund manager Algebra Capital. 'Either generous pricing, federal involvement or some other credit enhancement is required to place substantial amounts with foreign investors.'

The support fund, created to administer proceeds from the issue, does give investors a better idea of the type of structures to be used for the proceeds, which so far only the troubled developer of Dubai's palm-shaped manmade islands Nakheel has admitted to receiving.

'The problem with Dubai is the lack of details, numbers from both corporates and sovereigns,' said a debt fund manager in London after returning from an investment trip to Dubai. 'You can only buy things on the assumption they will be bailed out by Abu Dhabi. There is no reason for optimism any time soon.'

The emirate and state-linked firms have outstanding debt of about $80 billion. The perceived default risk of holding debt issued by Dubai entities had receded substantially after the emirate sold the first $10 billion to the central bank.

But investors are once again becoming wary of Dubai debt with little news on the restructuring of a $3.52 billion Islamic bond issued by Nakheel, which matures in December.

Dubai risk is trading between 500 to 1000 basis points (bps) over the London Interbank Offered Rate (Libor), according to Reuters data, with government unrated notes trading at about 500 bps.

'Given where Dubai names trade, it is unlikely the proposed bond will be sold in a public offering. It is currently more cost effective to raise funds with government subsidies of one type or another, whether federal guarantees or central bank underwriting,' said Kronfol.

The first bond was fixed-rate paper, yielding 4 per cent a year with a 5-year maturity. The next bond would need to be decidedly more attractive to appeal to international markets.

'You need high yields for a credit where the business model is basically broken,' the London banker said. 'I'm assuming that we won't get these yields as this is a sovereign credit. If you are positive on Dubai, you would buy the corporate debt that is already trading at distressed levels in the secondary market.'

In recent months foreign investors have shown an appetite for debt from the world's third largest oil exporter, especially for Abu Dhabi, which holds more than 90 per cent of the UAE's oil reserves. But neither the central bank, federal government or Dubai officials are willing to comment on whether Dubai debt would be backed federally - if so, it would be the first time the UAE government had backed a bond issue from one of the emirates.

The primary concern for investors remains a transparent process. The dismissal of Dubai's former finance chief, who was well-regarded in the financial community, did little to inspire confidence. He was surprisingly removed a day after leading a panel at the World Economic Forum on the future of the emirate.

No reason has been given for his dismissal. Most analysts believe he was too open, but unless the new finance minister is also communicative, Dubai may still grapple with recovery.

'It's not as if Dubai is the only place investors are looking at,' said ING's Popat. 'There are other countries in the Gulf and quasi government entities with bond issues that are very attractive and trade well in the secondary market. People tend to focus too much (on the idea) that the Gulf is just Dubai.'- Reuters

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Publication:TradeArabia (Manama, Bahrain)
Geographic Code:7UNIT
Date:Jul 29, 2009
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