Dubai to Avoid Glare of Public Markets and Raise Bonds Privately
Dubai Opts for Private Debt Over Eurobonds to Bolster Finances
(Bloomberg) --
Dubai is in talks to raise billions of dollars of debt privately instead of following Gulf neighbors by tapping public markets, as the emirate looks to bolster its finances and mitigate the economic fallout of the coronavirus pandemic.
The Middle East’s main business hub is discussing loans and private placements with around a dozen international and domestic banks, according to people with knowledge of the matter.
The emirate is seeking loans of 1 billion dirhams ($272 million) to 2 billion dirhams from each lender and asking them to find fixed-income investors to buy private placements, said one of the people, who asked not to be named. Dubai would probably repay the debt with a public bond in the next five years, they said.
Dubai, which boasts the world’s tallest building and islands in the shape of palm trees, mulled a public debt sale but was put off by the higher cost, the people said.
A representative for Dubai’s department of finance declined to comment.
Private placements and bilateral loans tend to be smaller than Eurobonds. But they can be quicker to execute and cheaper, especially for borrowers that, like Dubai, lack ratings from the three major rating companies.
“The situation for the Dubai government is not easy,” said Sergey Dergachev, a money manager at Union Investment Privatfonds GmbH in Frankfurt. “Issuing public debt will be possible, but they would need to pay a generous premium. One of 50-60 basis points to secondary debt would be fair as compensation for a non-existent credit rating, which in this difficult economic environment might be too high for the issuer.”
Several governments in the region have turned to public debt markets in the past month to fund stimulus plans and aid companies hit by virus-related lockdowns. Abu Dhabi, Qatar, Saudi Arabia and Israel have sold $29 billion of Eurobonds between them. April is the busiest month on record for Gulf sovereigns, according to data compiled by Bloomberg.
While those borrowers attracted huge demand -- Saudi Arabia got more than $50 billion of orders for a $7 billion deal -- they are among the strongest credits in the Middle East and each rated at least single-A. Investors are still cautious about emerging-market states that don’t have investment-grade ratings and some have had to delay plans to tap the market.
Dubai hasn’t issued a Eurobond since 2016. Yields on its existing dollar securities average around 4.3%, which is below that for the Middle East as a whole but above those for the region’s most recent borrowers, according to Bloomberg Barclays Indices.
The emirate, one of seven in the United Arab Emirates, raised 1 billion dirhams through a private placement of eight-year Islamic bonds at a rate of 4.71% earlier this month. Standard Chartered Plc was the sole arranger.
Dubai is suffering a prolonged slump in its property market, which is being exacerbated by the virus and the collapse in oil prices. For some investors, the downturn evokes memories of the 2008-09 global financial crisis when state-owned Dubai World restructured $23.5 billion of debt and property developer Nakheel PJSC built up $10.5 billion of unpaid bills.
A “significant portion” of the $23 billion in loans to Dubai government-related companies that mature by the end of 2021 may need to be restructured, Fitch Ratings Ltd. said in September.
Business conditions in Dubai worsened in March to the lowest level in at least a decade, according to an IHS Markit purchasing managers’ index. That’s forced the government to rethink major projects. It has also had to delay the World Expo 2020 and provide funding to carrier Emirates, most of whose planes are grounded.
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