Expected as early as next week, the emirate's first
government debt sale since the bursting of its real estate bubble and
subsequent debt crisis last year could be a step towards rehabilitating its
image in the eyes of international investors.
"It has to be at a decent price. But it will find an
audience, that's for sure," said Haissam Arabi, chief executive of
Dubai-based Gulfmena Alternative Investments.
Banking sources told Reuters that the government was
planning to issue up to $1 billion in bonds with a tenor of up to seven years.
Dubai's last sovereign bond sale was launched last
October - barely a month before its flagship conglomerate Dubai World shocked
investors by calling for a standstill on its debt. The company eventually asked
for a standstill on $26 billion of debt.
But since then, Dubai World has secured near-unanimous
creditor approval for its debt restructuring plans, while property subsidiary
Nakheel is expected to complete its debt workout plan by year-end.
"The hard work has been sorting out Nakheel and
Dubai World, and investors are more positive on Dubai because of its strong
relationship to the rest of the UAE and as the legacy issues have been or are
being addressed," said Aviva fund manager Jeremy Brewin in London.
"I am keen on owning Dubai debt."
Although its peers from the seven-member United Arab
Emirates (UAE) have continued to access capital markets, the only Dubai name to
have launched a bond so far this year has been state-run Dubai Electricity
& Water Authority (DEWA), which raised $1 billion via a bond in April.
While the DEWA deal showed the market's readiness to take
on more Dubai risk, the absence of a sovereign credit rating remains an
obstacle to widening the range of investors beyond those willing to accept
emerging market risk.
"You can still get onto benchmark indices without a
rating. But getting a rating is a way of improving your transparency to
investors as you have to open your books to the rating agency. Until Dubai gets
a rating, it will have to pay a premium," said one London-based fund
manager.
The manager, who declined to be named, said he made this
point to Dubai officials during investor meetings earlier this year. Dubai is
believed by the market to be intending to obtain a rating, but government
officials have not confirmed whether it is doing so.
A credit rating would go some way to improving clarity
over Dubai's creditworthiness, particularly as its state-owned companies sit on
more than $100 billion in debt, including $30 billion due to mature in
2011-2012.
Fellow UAE member Abu Dhabi has been rated 'AA' by
Standard and Poor's and Fitch Ratings; it is seen by many investors as a
stronger credit thanks to its oil revenues.
Investors say pricing on Dubai's new deal will be
determined by whether it obtains a rating and what that rating is.
"There's appetite, but it has to depend on the
pricing and structure...But it's the right moment in the market," said
Abdulkadir Hussain, chief executive of Mashreq Capital.
Dubai's five-year sukuk maturing 2014 is trading at a
yield of around 6.4 percent. Investors say another comparable credit is DEWA's
2015 deal, currently trading at 6.755 percent.
Risk perceptions of Dubai have eased since last year and
that has been reflected in the falling cost of insuring its sovereign debt.
Though Dubai may have to step up asset sales and government borrowing in coming
years to cope with the heavy debt repayment schedule for state-linked
companies, many investors think its status as a financial centre and support
from Abu Dhabi will avert any renewed crisis.
Five-year credit default swaps for Dubai have fallen from
a 2010-high of 655 basis points in mid-February to around 420 bps.
"CDS spreads...are probably going to stay around
there - they won't come down significantly more from there," said Mashreq
Capital's Hussain.
A successful bond issue could have an important impact in
encouraging secondary market trading of bonds within Dubai, some traders
believe. Trading dried up after the Dubai World crisis but in recent months has
been showing signs of recovery.