Dubai: Dubai’s default risk dropped five times more than the Middle East average this month as a series of debt repayment agreements showed government-related companies are benefiting from an economic recovery.
The cost of insuring the emirate’s debt for five years retreated 43 basis points in June to 352 on June 19, according to data provider CMA. That compares with an eight basis-point decline in average credit default swaps in the Middle East to 322, while contracts for the Group of 10 nations fell 13 basis points in the period to 152, data compiled by Bloomberg show.
Jebel Ali Free Zone FZE, a business park operator in Dubai under state-run Dubai World, and DIFC Investments LLC are among companies that have refinanced debt. Investors regard these deals as evidence that Dubai, which avoided a default in 2009, is living up to pledges that its companies would repay debt without state help as economic growth accelerates, pushing bond yields to record lows.
“All cylinders are firing and Dubai is definitely making strong progress with its deleveraging efforts,” Gus Chehayeb, a Dubai-based researcher on Middle East credit markets at Exotix Ltd said by phone on June 18. “The strategy of honouring its public obligations has paid significant dividends because it’s allowed the emirate to tap the capital markets to help the refinancing needs of its government-related entities.”
Record-low yields
Jebel Ali Free Zone raised $650 million (Dh2.4 billion) on June 12 by selling seven-year Islamic bonds to help repay a Dh7.5-billion ($2 billion) sukuk ahead of its November maturity. The company, which has $2.7 billion of debt maturing through 2019, according to data compiled by Bloomberg, is also arranging a $1.2 billion Islamic loan with eight banks to repay the sukuk.
DIFC Investments LLC, which owns properties in Dubai’s tax- free financial centre, obtained a $1.04 billion syndicated facility from a group of banks to help pay a $1.25 billion Islamic bond due this month.
The yield on Jebel Ali’s 7 per cent sukuk due 2019 fell 58 basis points since they started trading last week to 6.42 per cent Wednesday, data compiled by Bloomberg show. The yield on the Dubai government’s 6.396 per cent Islamic bonds due November 2014 plunged 48 basis points this month to a record 3.64 per cent.
Removing uncertainties
The emirate’s $82 billion economy, which relies on trade and hospitality for more than a third of gross domestic product, benefited from 10 per cent growth in visitors last year. Passenger traffic through Dubai’s airport, headquarters of Emirates, the world’s biggest airline by international passenger traffic, rose 8 per cent in the year to April to 4.57 million.
The property market is also picking up after a 2008 global downturn resulted in a 65 per cent drop in house prices. Fourth-quarter home sales were up 67 per cent from a year earlier to Dh2.85 billion, according to the emirate’s Land Department.
Recent financing deals have “definitely removed significant uncertainties around refinancing within Dubai, but have also set a different benchmark in terms of the cost of debt and also lending terms for large bank lines or capital market instruments,” said Franck Nowak, a corporate finance analyst at Moody’s Investors Service. “Confidence would further improve along with the conclusion of the other various ongoing bank restructurings, which could affect sentiment negatively or positively depending on how they conclude.”
Major overhang
Credit default swaps of the city home to the world’s tallest skyscraper are poised for the first monthly decline since March, according to CMA, which is owned by CME Group Inc. and compiles prices from a privately negotiated market. The contracts pay the buyer face value if a borrower fails to meet its obligations.
Still, Dubai’s contracts are more than double the level in neighbouring Abu Dhabi, holder of most of the United Arab Emirates’ oil reserves. They’re also the second-highest after Bahrain among nations in the GCC for which the swaps are traded.
Dubai, which gets only 2.2 per cent of GDP from oil, is vulnerable to a worsening of Europe’s debt crisis and a slowdown in global growth. State-controlled companies including Dubai Holding LLC and Drydocks World LLC are still in talks with lenders to restructure debt.
“A major overhang that remains is Dubai’s ability to repay its distressed government-related bank debt obligations,” said Exotix’s Chehayeb. Some $12 billion of bank debt “remains in restructuring negotiations. Even once resolved, these loans will continue to put pressure on Dubai banks’ non-performing loans and should lead to increased provisions.”
Worst over
Emirates NBD, the UAE’s biggest bank, said in April it expects the non-performing-loan ratio to rise to between 14 per cent and 15 per cent this year and as high as 16 per cent in 2013. Dubai and related companies have $41.7 billion of debt maturing in 2013 and 2014, according to Bank of America Merrill Lynch estimates in October.
“Foreign banks, mainly European, have been arm-twisted into several restructurings for the weaker” government-related companies, said Chehayeb. “Their appetite for lending into the emirate has therefore significantly declined.”
Financing deals are getting done. Emirates said this month it repaid $550 million of Islamic bonds in full on the maturity date. Dubai-based mortgage provider Tamweel PJSC started meeting investors this week for a possible dollar-denominated sukuk sale, three investors familiar with the matter said on June 18.
The yield on the government’s 5.591 bonds due 2022 has fallen 18 basis points in June to 5.05 per cent on Wednesday, the lowest in more than a month.
“There is a broadly held sense that the worst has definitely passed and that the next few years will be good to Dubai as long as the European situation doesn’t deteriorate catastrophically,” Rafakl Biosse Duplan, a fund manager at Finisterre Capital LLP, wrote in a note to investors last month. “Some of the distressed restructurings still ongoing in the loan market suggest that everything is far from perfect, but new financings are getting done.”
