Dubai Sukuk Wins Investor Confidence as Debt Accord Nears: Islamic Finance


By Dana El Baltai and Haris Anwar

Islamic bonds in Dubai are set to extend this year’s rally as Dubai World predicted it will complete debt restructuring in the “coming months,” said Unicorn Investment Bank BSC and Emirates NBD Asset Management.

The air traffic control tower stands at the Dubai World Central-Al Maktoum International airport. Photographer: Gabriela Maj/Bloomberg
The air traffic control tower stands at the Dubai World Central-Al Maktoum International airport. Photographer: Gabriela Maj/Bloomberg

The average spread on securities that comply with religious principles sold by Gulf Cooperation Council borrowers narrowed six basis points to 545 percentage points on July 23, a day after Dubai World announced the estimated timeframe for renegotiating its debt, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The difference reached 647 points on Nov. 30 after the state-owned company said it will delay repayment of its debt.

“Most sukuk investors have exposure to Dubai World, so they’re obviously reacting in a positive way,” Nida Raza, senior vice president of capital markets at Bahrain-based Unicorn, said in a telephone interview on July 22 in Manama. “People who were staying away from Dubai government bonds — both conventional and Islamic — are going to start buying more and more of it.”

Dubai World, the state-owned corporation seeking to renegotiate terms on $23.5 billion of liabilities, met with about 70 banks last week after the company and its main group of creditors agreed in May to alter terms on the debt. It said then that banks would be paid $4.4 billion in five years and another $10 billion over eight years at below-market interest rates supported by asset sales.

Bodes Well

The terms accepted by the main banks were unchanged when presented to other creditors, two people who attended the July 22 presentation said.

“As is customary at this stage of the process, this was an informational session and no resolution was sought in the meeting,” Dubai World said in an e-mailed statement. “Creditor banks will now have the opportunity to review the information provided before responding to the proposal.”

The average yield on Islamic bonds sold by Gulf Cooperation Council borrowers dropped four basis points to 7.17 percent on July 23, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. The rate reached 8.76 percent on Dec. 11.

The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 fell nine basis points to 7.38 percent on July 23, according to prices from Royal Bank of Scotland Group Plc. The yield may drop to 6.4 percent by the end of this year, Unicorn estimates. Investors would earn a return of 6.1 percent should the forecast prove accurate, according to data compiled by Bloomberg. The notes yielded 7.35 percent today.

The difference in yield between the Dubai Department of Finance’s sukuk and the Malaysian government’s 3.928 percent Islamic note due June 2015 has widened 52 basis points since May 28 to 435 basis points, according to data compiled by Bloomberg.

“The Dubai government’s credit was suffering,” said Raza at Unicorn, the ninth-largest underwriter of Islamic bonds this year based on data compiled by Bloomberg. “People weren’t sure if the government had the money to pay the debts off. Now that the companies are slowly working their problems out, it bodes well in terms of sentiment for the Dubai government bond.”

Nakheel Talks

Dubai World said on May 20 it reached an agreement with its main creditor group to restructure $14.4 billion of bank debt and $8.9 billion of government liabilities as it seeks to resolve a crisis that roiled global markets last year.

Real-estate unit Nakheel PJSC, which held a separate meeting with its lenders on July 14, said a group of its creditors negotiating on behalf of banks “unanimously supported” a proposal on altering the terms on $10.5 billion of loans and unpaid bills. Nakheel also expects to complete the restructuring over the “coming months,” it said.

The yield on Nakheel’s 2.75 percent sukuk fell to 15.3 percent from 86 percent on March 24, when Dubai’s government said it would support the company with $9.5 billion, according to prices compiled by Bloomberg.

Dubai and its state-owned companies have racked up $109.3 billion of debt, according to International Monetary Fund estimates, as the emirate transformed itself into a tourism, trade and financial services hub. About $15.5 billion of that is due this year, the IMF said.

More Restructuring

“The biggest hurdle that is preventing a sukuk or a bond rally is that investors are expecting more debt restructurings from the region,” Dubai-based Usman Ahmed, senior fund manager at Emirates NBD Asset Management, a unit of Emirates NBD PJSC, the United Arab Emirates biggest lender by assets, said in an interview yesterday. The unit oversees about $300 million of fixed-income assets.

“How other entities resolve their debt problems combined with increased global risk appetite should set the pace for a future bond rally,” Ahmed said.

Gulf issuers sold $2.5 billion of Islamic notes so far in 2010, down 23 percent from a year earlier, Bloomberg data show. Islamic securities returned 7.4 percent, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 9 percent over the same period, according to JP Morgan Chase & Co.’s EMBI Global Diversified Index.

DP World Favored

Dubai World controls DP World Ltd., the world’s fourth- biggest port operator, private equity firm Istithmar World PJSC and Economic Zones World, an operator of business parks such as Jebel Ali Free Zone. Istithmar bought New York luxury retailer Barneys New York Inc. in 2007 for $942.3 million, while Dubai World acquired a $5.1 billion stake in U.S. casino company MGM Mirage in 2008.

The yield on DP World’s 6.25 percent Islamic notes due in July 2017 declined 15.6 basis points to 8.4 percent today and is down 24.6 basis points this month, according to prices from Royal bank of Scotland Group Plc. The yield will decline to 8.25 percent in the next “couple of months,” said Raza of Unicorn.

The notes are a “good pick on a relative-value basis,” Emirates NBD Asset’s Ahmed said. He recommends investors buy DP World’s sukuk and sell Dubai Electricity & Water Authority’s $1 billion of 8.5 percent non-Islamic bonds maturing in April 2015.

“There is no question that Dubai will need to tap the debt markets again in the near future,” Ahmad Alanani, an associate director for the Middle East and North Africa at Exotix Ltd. in London, an investment bank specializing in illiquid securities, said in an e-mail on July 23. “The question is how receptive will the market be to a new Dubai issue.”

To contact the reporter on this story: Dana El Baltaji in Dubai at