UAE. Three-year old debt clouds hanging over Dubai dispersed this week as two of the most challenging bond maturities at its government-related entities were tackled, increasing confidence in the market and sparking renewed buying in the emirate's secondary credit.
DIFC Investments, the company that runs Dubai's iconic international financial centre, repaid in full a US$1.25 billion sukuk which matured on June 13, using funds raised through a partially government-guaranteed Islamic loan and a programme of asset sales.
Its repayment followed Jebel Ali Free Zone, which owns and operates a strategically vital trading hub, going a long way towards refinancing a US$2.04 billion-equivalent dirham sukuk due in November by issuing a highly successful new US$650 million, seven-year sukuk on Tuesday 12. The bond is part of a package, including a US$1.2 billion loan that is already in place, to help cover the redemption.
"This is a game-changer, a pivotal moment in the Dubai credit story. These maturities had been the focus and in the space of a week they have been stabilised," said Samad Sirohey, managing director at Citigroup, which ran JAFZ's sukuk alongside Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank, Dubai Islamic Bank, Emirates NBD, National Bank of Abu Dhabi, Standard Chartered and joint lead manager Samba.
These transactions draw a line under the three big bond maturities that Dubai entities were facing this year, after Dubai Holding Commercial Operations Group, a unit of Dubai Holding owned by the emirate's ruler, paid off a US$500 million obligation ahead of its February due date.
Dubai entities still have to finance around USD10bn in maturing debt, including bonds and loans, in 2012, but DIFCI, JAFZ and DHCOG had represented this year's "low quality bonds in the Dubai Inc pyramid", according to one analyst, who added the remaining debt all "has strong refinancing potential, so no one is concerned".
A relatively low yield of 7% for a B2/B (Fitch) rated credit did not deter investors from buying the new JAFZ sukuk, which attracted orders worth around USD2 billion. The bond promptly traded up on the break and held resolutely above par to be quoted at 101.375-101.75 at the end of its first day's trading, beating some traders' expectations and lifting the rest of the market.
"People expected JAFZ to trade around reoffer due to tight pricing, but there was surprisingly good demand and interest, which contributed to good momentum across the Dubai space in general," said one trader.
The most recent sukuk from Dubai's Department of Finance attracted a keen bid, to be quoted on June 13 at 103.25 in cash. Dubai's five-year CDS spread, meanwhile, has tightened almost 100bp since January 10, withstanding the resurgent volatility of the past few months to end June 13's session at 371.56bp, according to Thomson Reuters data.
JAFZ will now exercise the call option that was written into the outstanding 2012 bonds with shareholder approval last month. A statement to the Nasdaq Dubai today indicated that the trust through which the dirham-denominated bonds were issued will be dissolved on June 21.
While immediate concerns about Dubai's debt burden have lessened, the emirate remains a highly-leveraged state and 2014 will bring a new raft of government-related maturities. JAFZ itself is not out of the woods, with a leverage ratio of around six times Ebitda.
"The company still has their job cut out for them, leverage will remain elevated and the interest burden high," said Ahmad Alanani, a senior executive at Exotix, a brokerage firm that specialises in emerging markets.
However, this week's progress was aided by a willingness to explore different refinancing methods, breaking away from the once-favoured five-year bullet loan structure.
"The terms of these debt arrangements have significantly changed versus that of the previous instruments. In the case of JAFZ, they now have much longer maturities, more diversified funding sources and the syndicated facility has an amortization element and cash sweep provisions that provide increased certainty around the prospects of deleveraging in the process. These taken together reduce the uncertainty around future refinancing as compared to a bullet maturity scenario," said Franck Nowak, an analyst at Moody's in Dubai, which has placed JAFZ on review for a ratings upgrade and stabilised its outlook for DIFCI in light of the strides they've taken.
"The emirate is kicking hard into high gear," said Gus Chehayeb, associate director for MENA research at Exotix. "Challenges remain but they are firmly on the road to recovery."
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© 2012 IFR