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Low borrowing costs could trigger wave of bond sales

Pricing is lowest for a dollar-denominated sale

Gulf News

Dubai: The Dubai government's $1.25 billion (Dh4.59 billion) Islamic bond sale sets the stage for issuers in the emirate to take advantage of near record-low borrowing costs as they complete the refinancing of $15 billion this year.

The emirate which narrowly escaped a default in 2009 priced five-year Islamic bonds at 4.9 per cent and ten-year sukuk at 6.45 per cent. The five-year pricing is Dubai's lowest on record for a dollar-denominated international sale, data compiled by Bloomberg show.

Dubai last sold five-year sukuk at 6.396 per cent in October 2009, the data show.

It's also 59 basis points less than average yields on sovereign emerging-market bonds, the JPMorgan Emerging Markets Bond Index EMBI Global Sovereign Yields show.

Dubai's borrowing costs are declining following a string of repayments and restructurings by government-related companies.

The emirate's five-year credit default swaps have dropped more than three times as much as the credit risk in the six-nation Gulf Cooperation Council this year, according to CMA data.

Investor confidence

"Dubai has paid the cheapest price and that reflects that the confidence of local and the international investors in Dubai has come back," Samer Mardini, vice-president of fixed-income and Islamic finance products at SJS Markets said by email.

"This sale will encourage other Dubai government-related entities to tap the bond market and there would be appetite for another Dubai sale."

The yield on the 6.396 per cent sukuk due Nov-ember 2014 tumbled 144 basis points in 2012 to 4.13 per cent on Thursday, more than three times the decline in the average yield on sukuk in the GCC.

The yield on Dubai's Islamic bonds fell to a record low of 4.08 per cent on April 2. Dubai sold $500 million of non-Islamic ten-year bonds in June that mature in June 2021 and carry a put option after five years. Those were priced at 5.591 per cent, with yields falling to 5.17 per cent on Thursday, down 81 basis points.

Dubai will use proceeds from Thursday's sale for "something to do with the government," with none of the money going toward helping refinance debt of Jebel Ali Free Zone and DIFC Investments LLC, Mohammad Al Shaibani, director-general of the Dubai Ruler's Court, said Thursday.

DIFC Investments, a unit of the emirate's tax-free business financial centre, has $1.25 billion of sukuk maturing in June, while Jebel Ali Free Zone's Dh7.5 billion in Sharia-compliant notes are due in November.

Paving the way

"With oil above $100 a barrel, Dubai's credit default swaps under the 400 mark and the success of the new issue, I wouldn't be surprised if this paves way for more issuances," Hussain Al Banna, the head of fixed-income trading at Bahrain Islamic Bank, said.

Emirates NBD is looking to "tap the market at attractive pricing" to raise a total $2.5 billion from bond sales this year, chief executive officer Rick Pudner said.

Port operator DP World said last month it would repay a $3 billion revolving facility six months ahead of schedule with its own cash, while Dubai Holding Commercial Operations Group paid a $500 million bond that matured in February.

Last week's sale comes less than a month after the UAE Central Bank unveiled new lending limits designed to curtail banks' exposure to the government.

Banks can lend no more than 100 per cent of their regulatory capital to local governments and the same to government-related companies, the Central Bank said on April 4, setting a September 30 deadline for compliance.