Dubai: Dubai plans to sell 10-year dollar-denominated Islamic bonds as the Gulf emirate takes advantage of tumbling borrowing costs, according to four people familiar with the matter. The benchmark-sized sukuk may price to yield at the low 4 per cent range, according to the people, who asked not to be named because the details are private. The size of benchmark bonds is typically at least $500 million.
The issuance will be the first sovereign sukuk sale in the six-nation Gulf Cooperation Council (GCC) this year, according to data. Sales of bonds that comply with Islam's ban on interest surged to a record $21 billion in the region last year as borrowing costs plunged. The yield on Dubai's 6.396 per cent sukuk due in 2014 tumbled 344 basis points, or 3.44 percentage points, in 2012 to 2.13 per cent, the data show.
"I cannot imagine a more opportune time for Dubai to come to the market," Ghassan Chehayeb, research director for the Middle East and North Africa at Exotix, said yesterday.
Demand for sukuk
"Appetite for Islamic paper is growing exponentially, and sentiment towards Dubai is incredibly positive.
"The emirate has significant refinancing needs in 2015/2016, so it is critical that they continue to manage this challenging maturity schedule in advance."
Dubai, the second-biggest emirate in the United Arab Emirates, raked up $113 billion in debt to turn itself into a regional hub for commerce, transport and financial services, before teetering on the brink of default in 2009. Dubai state-linked maturities, not including restructured loans, amount to about $7 billion this year, almost $32 billion in 2014 and $9.6 billion in 2015, according to Bank of America Merrill Lynch estimates.
The emirate's credit risk dropped more than peers in the Middle East last year as state-linked companies paid and restructured debt. The cost of insuring the emirate's unrated bonds for five years has retreated 15 basis points this month to 210 on Sunday, according to data provider CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market.
"Investor's perception for Dubai credit risk has improved significantly in 2012 and the strong risk-on momentum continues into 2013," Apostolos Bantis, a credit analyst at Commerzbank in London, said yesterday.
The government hired HSBC, Standard Chartered, Emirates NBD, Dubai Islamic Bank and National Bank of Abu Dhabi to arrange the sale, the people said. The government's last bond issuance was in April, when it sold $1.25 billion of sukuk in two tranches, including $600 million of five-year notes at a coupon of 4.9 per cent. It also raised $650 million of 10-year bonds at a 6.45 per cent coupon. The offering secured $4.5 billion in bids.
Dubai plans to create an Islamic finance council to regulate equity and fixed-income products as it seeks to become a hub for the industry, taking on centers such Bahrain and Malaysia, home to the biggest sukuk market in the entire world. Islamic finance will become one of the economy's 'core' industries, the government said this month.
The premium investors demand to own Dubai's bonds over Malaysia's 3.928 per cent Sharia-compliant notes due June 2015 narrowed five basis points this month to 75 as of January 18.