Emirates Group launches UAE's first bond issue

Emirates Group yesterday announced the launch of a Dh750 million bond, to be listed on the Dubai Financial Market - surprising markets which had all along expected a Dh555 million offering.

The group has thus become the first corporation in the UAE to raise finance directly from investors through this mode, Sheikh Ahmed bin Saeed Al Maktoum, President of Dubai Department of Civil Aviation, and Chairman of Emirates, stated yesterday.

"We have launched the issue in response to demand from the UAE investment community," he said. "It offers investors the opportunity to be associated with the future growth of Emirates." Noting that its launch represents "an important diversification of funding for the group", he pointed out that there is always a need to widen the funding base and develop different resources as it gears up for future expansion.

The issue is being arranged by HSBC Financial Services (Middle East) Ltd and National Bank of Abu Dhabi, and lead managed and underwritten by HSBC Bank Middle East, Nbad, Emirates Bank Group and National Bank of Dubai.

With a minimum subscription of Dh5 million ($1.3 million), the dirham-denominated bond — the largest to be issued to date — will have a term of five years.

The bond is in the form of a floating rate note (FRN) issue with a maturity of five years. It will pay interest semi-annually at a rate of 70 basis points over six-month Ebor (Emirates interbank offered rate), to be reset every six months.

The issue will be cleared and settled through — as well as listed on — the Dubai floor. While the minimum investment amount will be Dh5 million during the primary distribution period, investors will be able to trade the FRNs in multiples of Dh100,000 ($27,400) via exchange brokers.

"This is a landmark in the development of the UAE financial market, and we are delighted to be associated with such an important transaction," said David Moleshead, investment banking director, HSBC Financial Services.

Added Terence D. Allen, Nbad head of treasury and investment banking division: "We have a strong record of success with the first two dirham bonds for overseas issuers, and are proud to be arranging the first dirham bond for a domestic issuer."

In the financial year ended March 2001, Emirates airline carried over 5.7 million passengers and 335 million kilos of cargo, and achieved record revenues of over Dh6.1 billion. Net profit for the airline alone stood at Dh422 million.

Officials closely associated with the bond float explained the issue has been fully underwritten by banks, with private placement activity having been initiated several weeks ago.

They pointed out that a substantial portion of the issue had already been placed with commercial banks and corporates, and were confident the issue would win oversubscription. Issue closure would likely be by end-month, they felt.

A roadshow explaining details will be held in Dubai on Saturday, and in Abu Dhabi on Sunday, they added. The pioneering dirham-denominated local bond issue by Emirates Group might be the first in a series of such instruments to be announced by the group, bankers and analysts said yesterday.

They felt the second in the series may not be long in coming. All were in agreement that it is a great development not only for corporates and investors, but also in the development of the local capital market.

Significantly, the bond changes the face of financing options for top notch corporates such as Emirates to raise capital. Equally, the bond will not only give better returns than fixed deposits, but also allow a credible choice of quality issues for investors to select as a secure means of investment in a country which has no credit rating agency.

"This is the first bond that will be listed on the Dubai Financial Market, and is a key step forward for us," stated Essa Abdulfattah Kazim, DFM director-general. He pointed out that it would help the fledgling market widen its product range.

Kazim added that listing would be effected once the issue is fully subscribed. The half-yearly interest on the bond paid at a rate of 70 basis points (bps) over six-month Ebor (Emirates Interbank Offered Rate) will be available directly to investors and not to banks, which normally make this money, pointed out a senior investment banker closely involved with the bond issue. "The note (bond) holder will earn this money now," he added.

Explaining the relatively small size of the issue, financial analysts felt the issue was in the nature of initially testing the waters. They pointed out that the group currently had a fair amount of debt on its books.

"A series of bond issues could eventually be used to swap the debt in favour of such instruments," one pointed out. It is a good development for the corporates such as Emirates airline which now have another financing option instead of the usual equity or bank loans, said Simone Desa, senior research analyst, Union National Bank.

"It will go a long way in developing the local capital market as it will be listed on the DFM," she added. Bankers reckon the bond will elicit a good response, even oversubscription. Admittedly, it will not be rated. But as one banker argued: "The credit standing of the issuer is beyond doubt and such a bond will elicit a tremendous response. Emirates is a quality corporate with a strong balance sheet and profits of Dh420 million. It is a zero-risk rated asset."

Although there has been scattered talk of a credit rating agency being set up in the UAE, no concrete measures have yet been taken. "The issue will jump-start the bonds sector, and pave the way for a secondary fixed income market," noted Walid Shihabi of Dubex Securities.

He felt it would be traded mostly among banks due to the advantages of liquidity and easy negotiability, while pointing out its quasi-sovereign status would afford it virtually risk-free.

Other analysts, however, felt the lack of a sovereign bond issue here meant the market would still be less active than those with sovereign bonds, as for instance with Qatar and Lebanon. They also pointed out that the Dh100,000 tradeable lots meant there would be only 7,500 units, which is unlikely to see very active trading at the retail level. But they agreed it would be actively traded by banks as negotiable instruments.

While such a bond undoubtedly opens new avenues of financing, it is also important that only top-quality issuers enter the bond market and quality banks arrange such issues, said Terence Allen, NBAD head of treasury and investment banking.

Earlier, the two bond issuers were both international companies. The Dh350 million bond issue by BMW U.S. Capital Corp in 1999 — the first issue in the UAE — was sold out in 48 hours. NBAD was it lead manager while NBD acted as co-lead manager.

The second bond issue was by the UK's Abbey National last year. It was a Dh400 million bond lead managed by NBAD. "Debt instruments are here to stay and will be an important investment vehicle. More issues are likely to hit the market in the future," said an equity analyst.

Moreover, debt instruments such as bonds will also bring stability to the currently weak and somewhat bearish stock market, t