Dubai: One of the first big bond issues from a state-owned company in the Gulf this year is likely to set a bullish tone for the market — so bullish, some market participants believe, that it might price inside the sovereign.
Dubai Electricity and Water Authority (Dewa) plans to issue up to $1 billion (Dh3.67 billion) of sukuk in the first quarter, using the proceeds to refinance existing debt and invest in its projects, Chief Executive Saeed Mohammad Al Tayer said on Tuesday.
Dewa last tapped the bond market in October 2010, when it priced a $2 billion, dual-tranche conventional bond. The improvement in Dubai’s image among investors since then will help it win better pricing relative to the rest of the market.
“With benchmark interest rates low and Dubai CDS (credit default swaps) also close to all-time low levels of around 200 basis points, we think this is a good time for Dewa to tap into the markets to raise long-term capital,” said Biswajit Dasgupta, head of treasury and trading at Invest AD in Abu Dhabi.
“With Dubai perception extremely positive in the international community and global investors increasingly adding Dubai risk into their portfolios, the Dubai in Dewa will be seen positively by investors.”
If Dewa conducts the issue in the next few weeks, it is likely to be one of the first major issuers from the region this year, which would give it an early-mover advantage as investors start to build their holdings in the new year.
It may also benefit from its choice of a sukuk rather than a conventional bond, since a supply/demand imbalance in Islamic bonds has often pushed their yields below those of equivalent conventional bonds since last year.
These factors could conceivably help Dewa price its sukuk at a yield below Dubai’s outstanding sovereign bond — a very rare event in any bond market, and unheard-of in the Gulf’s recent history. Last October, Turkish brewer Anadolu Efes issued a $500 million, 10-year bond at a yield almost 10 basis points inside the Turkish sovereign curve.
“Dewa is one of the most defensive credits in the Middle East and we believe that its bonds are cheap relative to regional and EM (emerging market) comparables,” JP Morgan said in a research note this week.
“Diverging from our earlier view, we now believe that Dubai government bond spreads should not define the floor for Dewa.”
Yields on Dewa’s outstanding bonds have been falling for over a year and are at record lows, thanks to a general rally in Dubai bonds and upgrades by rating agencies. Last November, Standard & Poor’s raised its long-term rating of Dewa to BBB from BBB-, citing an improved financial performance and its plan to refinance upcoming maturities.
Dewa’s $500 million, 6.375 per cent bond maturing in 2016 was yielding 2.72 per cent on Thursday, down about 300 bps from a year ago.
The yield on its 2020 maturity has tightened even more. The $1.5 billion bond yielded 3.66 per cent on Thursday, down 348 bps.
Dubai’s $750 million, 7.75 per cent conventional bond maturing in 2020 is yielding 3.63 per cent, down 340 bps. It is benefitting from a sense that Dubai has largely put its 2009-2010 debt crisis behind it, as its economy grows robustly and real estate prices start to recover.
The sovereign bond has continued to perform well since the release at the end of last month of Dubai’s 2013 budget plan, which would raise state spending moderately while cutting the size of the budget deficit by 18 per cent, to below 0.5 per cent of gross domestic product.
But Dewa has one advantage over the Dubai sovereign; Dewa has a credit rating, which could make international investors more comfortable buying the bond. Dubai remains unrated, and has not indicated it will seek one in the near term.
“The investment grade rating of Dewa in the context of Dubai being “unrated” gives more comfort to the global EM fund managers and gives an extra kicker in terms of money flowing into Dewa debt,” said Invest AD’s Dasgupta.
Dewa’s rating may encourage investors to look at its individual corporate profile, rather than viewing it merely as an arm of the Dubai government. Its corporate strengths include its monopoly status, the government’s “accommodating” stand on price increases, and its state-of-the art transmission and distribution networks, JP Morgan said.
Another argument for Dewa possibly pricing inside Dubai is that even a private company, Majid Al Futtaim Holding, has come very close to the sovereign in the secondary market.
The $500 million, 5.25 per cent, 2019 bond issued by MAF Holding last year yielded 3.60 per cent on Thursday, for a z-spread — an expression of relative value — of 242 bps. The Dubai sovereign had a z-spread of 226 bps, according to Thomson Reuters data.
Regardless of their relative pricings, yields on the debt of both Dubai and Dewa may have further to fall, Dasgupta said.
“With the momentum still strong on the Dubai complex, we feel that there is room for a further squeeze of 20-25 bps on the Dubai and Dewa names.”