DUBAI: Foreign investors are unlikely to tap into a $10 billion Dubai bond unless officials give details such as whether it has federal backing, raising the prospect the central government may intervene again to support the emirate.
Dubai, one of the seven United Arab Emirates, propelled itself into the spotlight as a tourism hub during a six-year oil-fueled boom, but the downturn rocked its foundations based on excess lending and a transient expatriate population.
The UAE’s central bank took up the first tranche of a $20 billion bond issue in February and Dubai’s new finance chief announced last week that the second tranche would be open to local and foreign investors.
“Investors in the region know this $10 billion will be used to support infrastructure and liquidity of government related entities (GREs),” said Nish Popat, ING’s head of fixed income in the Middle East. “But will it be $10 billion? Will there be a federal guarantee? Will there be a rating, and if so will there be greater transparency in finances of the country?
“There are more questions than answers for investors.”
The UAE, and Dubai in particular, has been hit hard by the downturn. Construction projects were canceled or postponed after the global credit crunch robbed developers of access to cheap finance while a slump in oil prices slashed state revenues across the region. The emirate will not identify firms who receive help, leaving it up to each entity to disclose its dealings.
“The reality is Dubai still has significant measures to take in order to tap financial markets independently,” said Mohieddine Kronfol, managing director at Dubai-based fund manager Algebra Capital. “Either generous pricing, federal involvement or some other credit enhancement is required to place substantial amounts with foreign investors.”
The support fund, created to administer proceeds from the issue, does give investors a better idea of the type of structures to be used for the proceeds, which so far only the troubled developer of Dubai’s palm-shaped manmade islands Nakheel has admitted to receiving. “The problem with Dubai is the lack of details, numbers from both corporates and sovereigns,” said a debt fund manager in London after returning from an investment trip to Dubai. “You can only buy things on the assumption they will be bailed out by Abu Dhabi. There is no reason for optimism any time soon.”
The emirate and state-linked firms have outstanding debt of about $80 billion. The perceived default risk of holding debt issued by Dubai entities had receded substantially after the emirate sold the first $10 billion to the central bank.