Dubai credit-risk drop exceeds region on repayments
Dubai’s default risk drops five times more than the Middle East average this
month as a result of a series of debt repayment agreements
Dubai’s default risk dropped five times more than the Middle East average
this month as a series of debt repayment agreements showed
government-related companies are benefiting from an economic recovery.
The cost of insuring the emirate’s debt for five years retreated 43 basis
points in June to 352 on June 19, according to data provider CMA. That
compares with an eight basis-point decline in average credit default swaps
in the Middle East to 322, while contracts for the Group of 10 nations fell
13 basis points in the period to 152, data compiled by Bloomberg show.
Jebel Ali Free Zone FZE, a business park operator in Dubai under state-run
Dubai World, and DIFC Investments LLC are among companies that have
refinanced debt. Investors regard these deals as evidence that Dubai, which
avoided a default in 2009, is living up to pledges that its companies would
repay debt without state help as economic growth accelerates, pushing bond
yields to record lows.
“All cylinders are firing and Dubai is definitely making strong progress
with its deleveraging efforts,” Gus Chehayeb, a Dubai-based researcher on
Middle East credit markets at Exotix Ltd said by phone on June 18. “The
strategy of honouring its public obligations has paid significant dividends
because it’s allowed the emirate to tap the capital markets to help the
refinancing needs of its government-related entities.”
Record-low yields
Jebel Ali Free Zone raised $650 million (Dh2.4 billion) on June 12 by
selling seven-year Islamic bonds to help repay a Dh7.5-billion ($2 billion)
sukuk ahead of its November maturity. The company, which has $2.7 billion of
debt maturing through 2019, according to data compiled by Bloomberg, is also
arranging a $1.2 billion Islamic loan with eight banks to repay the sukuk.
DIFC Investments LLC, which owns properties in Dubai’s tax- free financial
centre, obtained a $1.04 billion syndicated facility from a group of banks
to help pay a $1.25 billion Islamic bond due this month.
The yield on Jebel Ali’s 7 per cent sukuk due 2019 fell 58 basis points
since they started trading last week to 6.42 per cent, data compiled by
Bloomberg show. The yield on the Dubai government’s 6.396 per cent Islamic
bonds due November 2014 plunged 48 basis points this month to a record 3.64
per cent.
Removing uncertainties
The emirate’s $82 billion economy, which relies on trade and hospitality for
more than a third of gross domestic product, benefited from 10 per cent
growth in visitors last year. Passenger traffic through Dubai’s airport,
headquarters of Emirates, the world’s biggest airline by international
passenger traffic, rose 8 per cent in the year to April to 4.57 million.
The property market is also picking up after a 2008 global downturn resulted
in a 65 per cent drop in house prices. Fourth-quarter home sales were up 67
per cent from a year earlier to Dh2.85 billion, according to the emirate’s
Land Department.
Recent financing deals have “definitely removed significant uncertainties
around refinancing within Dubai, but have also set a different benchmark in
terms of the cost of debt and also lending terms for large bank lines or
capital market instruments,” said Franck Nowak, a corporate finance analyst
at Moody’s Investors Service. “Confidence would further improve along with
the conclusion of the other various ongoing bank restructurings, which could
affect sentiment negatively or positively depending on how they conclude.”
Major overhang
Credit default swaps of the city home to the world’s tallest skyscraper are
poised for the first monthly decline since March, according to CMA, which is
owned by CME Group Inc. and compiles prices from a privately negotiated
market. The contracts pay the buyer face value if a borrower fails to meet
its obligations.
Still, Dubai’s contracts are more than double the level in neighbouring Abu
Dhabi, holder of most of the United Arab Emirates’ oil reserves. They’re
also the second-highest after Bahrain among nations in the GCC for which the
swaps are traded.
Dubai, which gets only 2.2 per cent of GDP from oil, is vulnerable to a
worsening of Europe’s debt crisis and a slowdown in global growth.
State-controlled companies including Dubai Holding LLC and Drydocks World
LLC are still in talks with lenders to restructure debt.
“A major overhang that remains is Dubai’s ability to repay its distressed
government-related bank debt obligations,” said Exotix’s Chehayeb. Some $12
billion of bank debt “remains in restructuring negotiations. Even once
resolved, these loans will continue to put pressure on Dubai banks’
non-performing loans and should lead to increased provisions.”
Worst over
Emirates NBD, the UAE’s biggest bank, said in April it expects the
non-performing-loan ratio to rise to between 14 per cent and 15 per cent
this year and as high as 16 per cent in 2013. Dubai and related companies
have $41.7 billion of debt maturing in 2013 and 2014, according to Bank of
America Merrill Lynch estimates in October.
“Foreign banks, mainly European, have been arm-twisted into several
restructurings for the weaker” government-related companies, said Chehayeb.
“Their appetite for lending into the emirate has therefore significantly
declined.”
Financing deals are getting done. Emirates said this month it repaid $550
million of Islamic bonds in full on the maturity date. Dubai-based mortgage
provider Tamweel PJSC started meeting investors this week for a possible
dollar-denominated sukuk sale, three investors familiar with the matter said
on June 18.
The yield on the government’s 5.591 bonds due 2022 has fallen 18 basis
points in June to 5.05 per cent on Wednesday, the lowest in more than a
month.
“There is a broadly held sense that the worst has definitely passed and that
the next few years will be good to Dubai as long as the European situation
doesn’t deteriorate catastrophically,” Rafakl Biosse Duplan, a fund manager
at Finisterre Capital LLP, wrote in a note to investors last month. “Some of
the distressed restructurings still ongoing in the loan market suggest that
everything is far from perfect, but new financings are getting done." |