Published: March 16, 2009
In late February, the Dubai government issued a US$10bn bond, which was entirely subscribed by the UAE central bank, in a sign that the debt-laden Emirate is receiving greater federal support.
The five-year bond is part of a US$20bn programme that the Dubai government announced in February, and it says it plans to issue the second tranche of the debt shortly, to private and international investors.
Dubai stocks rallied on the news, with some real estate companies, like Emaar, rising by 8% in a day.
"We took out the uncertainty that was weighing on Dubai," says Raed Safadi, chief economist for the Dubai government. "Businesses can now get on with their operations."
Dubai corporates, including particularly state-owned corporates, have borrowed heavily on the international markets in the last few years, to finance the city's break-neck expansion. Fitch rating agency estimates the so-called 'Dubai Inc' corporates have around US$11bn to re-finance this year, though that could be a conservative estimate.
Many western banks have been cutting back their exposure to the Emirate, amid concerns over a rapid fall in house prices and a lack of liquidity in the local market.
Investors have been looking for a sign that Abu Dhabi, the oil-rich neighbouring Emirate, would support Dubai financially.
The week before the government's bond issue, Borse Dubai managed to re-finance US$2.5bn of a US$3.8bn loan maturing this year.
One banker who worked on the deal says: "Last year's deal was done at 80bps. This year, Borse Dubai was obliged to pay 350bps, and 1% in fees. The deal was only completed because Dubai Islamic Bank and Emirates Bank came in at the last minute and took half of the deal. It wasn't clear, but most of the syndicate believed they were really representing the central bank."
Another banker who worked on the deal says that the central bank bought US$1bn of the deal. The Dubai government also injected US$1bn into the company in equity.
Some foreign banks who worked on the original deal declined to be involved in the re-financing, including Barclays and Citigroup. HSBC, meanwhile, actually increased its participation compared to the original deal.
The Dubai Electricity and Water Authority (DEWA), is now trying to re-finance a US$2.2bn loan. Luigi Landoni, general manager for the Dubai office of Intesa Sanpaolo, says: "Last year, it paid 30bps. This year, it is prepared to pay 300bps. It makes it very attractive for banks."