Next year will be a crucial one for Dubai Inc. as a significant amount of debt matures in the year. Analysts expect the emirate to service these maturities, but they expect external support. Here's a look at Dubai's options.
June 9, 2011
09 June 2011 2012 will be a crucial year for Dubai Inc. as a significant amount of debt matures in the year. Analysts expect the emirate to service these maturities, but they expect external support. Here's a look at Dubai's options. 2012 is going to be a major year for the emirate of Dubai as it will see a number of major redemptions in the bond market.
Investors have been closely watching the emirate's move ever since Dubai World defaulted on that grim Eid weekend of November 25, 2009, and since then the emirate has no longer been the darling of bond investors.
Dubai would argue that much water has passed under the bridge since then. Dubai World has made up with its creditors and put into place a robust debt plan. Meanwhile, other Dubai entities have been paying their dues or agreeing to rollover maturities in happy agreement with their creditors.
Exotix, a frontier market investment banking boutique, notes that 18 months after Dubai World's standstill request caused global shockwaves, the emirate has become the focal point of MENA's April rally, itself the strongest in a year.
"Dubai sovereign spreads have tightened over 133bp since 16 March, and over 188bp since the spike on 30 November 2010, itself induced by Dubai Holding seeking extensions on credit lines," wrote the bank in a report on Dubai a month ago. Since then spreads have tightened to around 384 bps, as the emirate rapidly declines from its ranking as one of the top five sovereigns most likely to default.
In addition, Abu Dhabi stepped in Dubai's hour of need and offered $20-billion - we believe there is more where that came from. Since the arrival of the Arab Spring, there is even more reason to believe that Abu Dhabi will not let a major default occur as it would be loathe to face any political fallout due - in short it will take on the moral hazard if need be.
Still, the markets have not forgiven Dubai. In the first quarter, Dubai remained among the 10 most likely countries (or city states) to default, according to CMA Datavision, which tracks credit default swaps (CDS) and bond pricing based on data data provider CMS.
Standard Chartered Bank sees 2012 as a crucial year for the emirate.
"Dubai faces an onerous debt redemption schedule over the next few years," notes the bank in a note. "While the restructuring at Dubai World has bought the emirate some time, it has done little to address the absolute size of its outstanding debt as there have been no meaningful haircuts and few (publicly disclosed) asset sales."
It is important to differentiate that most of these maturities are loans, which are easier to handle, than bonds which are more widely held.
The bank expects Dubai to service the 2012 maturity bonds as the emirate needs to frequently access international capital markets.
"We expect that Dubai will use the same template as that used for the Dubai World/Nakheel restructuring - i.e., servicing the bonds and restructuring the loans - in dealing with the 2012 bond maturities. However, we anticipate that external assistance could be required, particularly to deal with the larger maturities," says Standard Chartered Bank.
Standard Chartered Bank's point about it needs to regularly access capital markets is important.
Dubai has built up its excellent infrastructure of roads, railways and airport via debt, and given the emirate's ambition of being an unrivaled regional hub, it will need to continue to seek loans and raise bonds.
On June 2, Emirates airline, the city's ambitious plan successfully raised a five-year $1-billion bond with a coupon of 5.125%, implied Z-spread of around 355bps - which is inside the Dubai sovereign range and wide to DEWA and DP World.
"Emirates should eventually settle at a level between DP World and the sovereign (the spread differential between the two on the curve is currently about 50bps)," says Standard Chartered Bank.
"Given the current price whisper, we see some upside (20-25bps) for Emirates at these levels, particularly given the recent strong momentum behind GCC credit - spreads in Dubai have tightened about 80-100bps since the beginning of the year (Chart 1). However, unlike DP World and DEWA, Emirates is unrated (as is the Dubai sovereign), which could prevent some investors from getting involved in the deal."
