Dubai Gets Bank Loans as Economy Defies Global Rout: Arab Credit

By Arif Sharif and Stefania Bianchi

Aug. 11 (Bloomberg) -- Dubai state companies are securing bank financing as the latest tumult in global markets fails to derail the emirate’s recovery from the 2009 debt crisis.

Dubai Holding LLC, one of the three main state-owned holding companies, reached an accord with lenders to extend a $1.16 billion loan to December 2016, according to a company official. Port & Free Zone World FZE, an intermediate holding company for port operator DP World Ltd., is raising $850 million to refinance debt, three bankers familiar with the plan said. Investment Corporation of Dubai said on Aug. 8 it will repay $4 billion of loans when they mature on Aug. 21.

“Banks are continuing to extend financing to Dubai Inc. because of its improving economy and debt profile,” Gus Chehayeb, a Dubai-based associate director at investment bank Exotix Ltd. said by e-mail yesterday. There is “encouraging evidence with regards to its willingness to repay debt, sell assets, and stay current on its interest payments,” he said.

While about $8 trillion in value was erased from global stock markets between July 22 and Aug. 8 amid concern growth in Europe and the U.S. is slowing, Dubai’s share index is little changed and benchmark bonds have climbed. Gross domestic product in the emirate, which received a $20 billion bailout in 2009 from its central bank and neighboring Abu Dhabi, may grow about 2.8 percent this year, according to the International Monetary Fund. The government estimates the economy grew 2.4 percent in 2010 after contracting in 2009.

Declining Yields

The yield on Dubai’s 7.75 percent dollar-denominated bond due in 2020 dropped 10 basis points, or 0.10 percentage point, to 6.529 percent yesterday, from as high as 6.85 percent in July, according to data compiled by Bloomberg. After hitting a one month-high on Aug. 9, the yield on Dubai’s Islamic bonds due in 2014 declined 25 basis points yesterday to 4.618 percent, the biggest one-day decline since December.

Investment Corp. of Dubai said on Aug. 8 it will repay $4 billion of loans when they mature on Aug. 21, rather than pursue refinancing it began in May. The obligation will be repaid from internally generated cash, mainly dividends received from the company known as ICD’s operating subsidiaries, according to a statement yesterday.

“ICD paying back $4 billion of maturing debt is a very strong message that Dubai’s debt story is on an increasingly better footing,” said Rawad Hakme, the Dubai-based co-manager of fixed income at the United Arab Emirates unit of EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank. “Credit investors are all the more comfortable when a borrower pays off its dues especially in times of global duress. Dubai’s perceived creditworthiness is on the rise.”

‘Very Positive’

The cost to insure Dubai’s debt against default dropped yesterday by six basis points to 364 basis points, after hitting 370 on Aug. 9, the highest level in more than three months, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps, which pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements, are down about 44 percent from the 655 basis points reached in November 2009 after state-owned Dubai World announced plans to restructure about $25 billion of debt.

“If this is true de-leveraging, that is no other parts of ICD have raised money to pay this, it is very positive,” said Abdul Kadir Hussain, who helps oversee $2 billion in fixed- income assets as chief executive officer at Mashreq Capital DIFC Ltd. in Dubai. Even if the subsidiaries have borrowed, “the debt is essentially closer to the operating companies, which for debt holders is a better place to be,” he said by phone.

Economic Rebound

Port & Free Zone’s five-year loan has conventional and Islamic portions and pays a margin of 350 basis points over benchmark rates, said one of the bankers, who declined to be identified because the deal is yet to be made public. HSBC Holdings Plc, Standard Chartered Plc, Deutsche Bank AG and Citigroup Inc. are managing the conventional loan, two of the three bankers spoken to said.

Dubai’s credit risk has dropped over the past two years as debt restructuring deals, bond repayments and profitability at companies boost confidence in the emirate’s economic rebound. The second-biggest of seven sheikhdoms that make up the U.A.E., Dubai is also benefiting from stable government as political upheaval sweeps other parts of the Middle East.

DP World, Emirates

Dubai Holding Commercial Operations Group LLC, a unit of Dubai Holding said July 14 the company had repaid a 250-million Swiss franc ($324 million) bond and is committed to meeting future obligations. Dubai Group LLC, an investment company owned by the emirate’s ruler, is in talks with banks to alter the terms on $10 billion of liabilities, while state-owned Dubai World forged an accord with creditors at its restructuring in March.

DP World, the world’s fourth-biggest port operator, posted an 11 percent rise in container volumes in the first half and said it expects to have the best results in the industry. Dubai’s Emirates NBD PJSC, the U.A.E.’s biggest bank by assets, reported an 87 percent surge in second-quarter profit to 744.5 million dirhams ($203 million). Tamweel PJSC, the mortgage company rescued by Dubai Islamic Bank PJSC in September, reported a five-fold jump in second-quarter profit on July 19 as bad-loan provisions dropped.

The emirate has $31.2 billion of debt coming due this year and in 2012, according to an IMF report published on June 16.

Debt Profile

“Although Dubai Inc. still has a challenging debt burden, its debt profile has improved in that a meaningful portion of its bank debt has been extended,” Chehayeb at Exotix said.

The extra yield investors demand to hold Dubai’s 7.75 percent dollar bond due October 2020 over Abu Dhabi’s 6.75 percent debt maturing April 2019 dropped to a record-low 268 basis points on Aug. 1, according to data compiled by Bloomberg. The gap has since widened 27 basis points, the data show.

The Dubai government raised $500 million from the sale of 10-year bonds with a five-year put option in June at a yield of 3.75 percent over the five-year mid-swap rate, or 5.59 percent. The sale received more than $1.8 billion in bids. ICD-owned Emirates, the world’s biggest airline by international passengers, raised $1 billion in June from the sale of five-year bonds.

‘Ahead of the Curve’

The average yield on debt in the six Gulf Cooperation Council nations dropped 11 basis points to 4.682 percent yesterday, according to the HSBC/NASDAQ Dubai GCC Conventional U.S. Dollar Bond Index. Default swaps for Abu Dhabi dropped two basis points yesterday to 99. Contracts for Greece, which is getting a bailout from the European Union to avoid defaulting on its debt, jumped 57 basis points to 1,733. Spain’s gained 42 basis points to 390.

Federal Reserve Chairman Ben Bernanke said on Aug. 9 that policy makers will keep the U.S. key benchmark rate at a record- low of zero to 0.25 percent at least through mid-2013 to bolster the economy. The dollar advanced against nine of the 16 major currencies tracked by Bloomberg yesterday.

“Dubai has been fortunate to be ahead of the curve in debt restructuring and de-leveraging, making it credit-worthy once more,” Emad Mostaque, a London-based Middle East and North Africa strategist at Religare Capital Markets Plc said by e- mail. “With a dollar peg and U.S. interest rates lower for longer, the U.A.E. in general should attract more interest.”

--With assistance from Alaa Shahine in Cairo and Dana El Baltaji in Dubai. Editors: Emma O’Brien, Laura Zelenko
To contact the reporters on this story: Arif Sharif in Dubai at asharif2@bloomberg.net; Stefania Bianchi in Dubai at sbianchi10@bloomberg.net
To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net
Source: Business Week