UAE’s First Federal Debt Adds to Borrowing Rush Before Fed Taper
(Bloomberg) -- The United Arab Emirates is marketing the first bond sale in its 50-year history as a combined federation, joining the rush of emerging-market borrowers tapping investors before the Federal Reserve starts winding down its pandemic stimulus.
The securities, which are denominated in dollars, will mature in 10 and 20 years, according to a person familiar with the matter who’s not authorized to speak publicly and asked not to be identified. The UAE is also offering a 40-year dual-listed Formosa bond -- debt issued in Taiwan and denominated in a currency other than the Taiwan dollar. Proceeds from the debt will go toward infrastructure projects and investments by its sovereign wealth fund.
While several of the seven emirates, including Abu Dhabi, Dubai and Sharjah, have tapped the market over the years, the UAE has never done so as a single entity. The debt sale comes after a turbulent week that drove short-term Treasury yields to the highest levels since the pandemic began. As investors start pricing in higher borrowing costs in anticipation of the Fed’s tapering of its asset purchases, emerging-market governments -- both regional and global -- have been rushing to bond markets.
The bonds “are going to be popular with investors given the novelty of this issuance,” said Richard Segal, a research analyst at London-based Ambrosia Capital. Based on actual and implied ratings differentials, a federal UAE bond would trade between Abu Dhabi and Dubai government bonds, but closer to Abu Dhabi, he added.
The federal government is expected to post a wider deficit of 4.9 billion dirhams ($1.3 billion) in 2021, from a deficit of 2.93 billion dirhams a year ago, according to the prospectus seen by Bloomberg. It is estimated to spend 247.3 billion dirhams in the 2017-2021 period.
The UAE anticipates a time-limited negative impact from Covid-19 on the economy and sees a longer-term positive effect given greater focus on trends such as digitization and diversification, according to the prospectus. The nation’s central bank expects that GDP will return to 2019 levels by next year, the document showed.
Abu Dhabi Commercial Bank, BofA Securities, Citigroup Inc., Emirates NBD Capital, First Abu Dhabi Bank, HSBC Holdings Plc, JPMorgan Chase & Co., Mashreqbank and Standard Chartered Bank are managing the sale. The Gulf nation’s debt is rated Aa2, the third-highest investment grade, by Moody’s Investors Service, and one step lower at AA- by Fitch Ratings.
The UAE passed a law in October 2018 allowing the federal government to issue sovereign debt for the first time, enabling its emirates -- which have weaker credit assessments -- to benefit from a higher debt rating and lower borrowing costs. Emirates Development Bank, a lender wholly owned by the federal government, in June mandated banks for an international bond sale under the new law.
A federal bond sale would make it easier for investors to value debt issued by the country’s sovereign and corporate borrowers. The federal government is set to be fully backed by oil-rich Abu Dhabi -- the UAE’s capital and its wealthiest emirate -- if needed, according to Moody’s.
It said the government may issue bonds denominated in various currencies from time to time under its global medium-term note program to help fund projects and investments by Emirates Investment Authority.
The federation of the UAE consists of seven emirates -- Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Fujairah and Ras Al Khaimah. Abu Dhabi is the capital city of the UAE.
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