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Sovereign bonds: Dubai – The rewards of being in the UAE

Is investor generosity towards Dubai justified?

Given the regional unrest, Middle East sovereign bonds have shown a surprising rally. As Euromoney went to press, sovereign spreads were tighter on average than in mid-February: evidence that the Arab Spring benefits some, especially via the oil price.

Even more surprising is that oil-poor but politically stable Dubai is at the forefront, with its sovereign spreads tightening by some 150 basis points over the past two months. State-linked corporate yields have declined even more rapidly, in some cases by more than 500bp.

The Dubai government is still on track to take direct ownership of troubled flagship developer Nakheel, now a subsidiary of state-owned conglomerate Dubai World. The buyout is a key condition of Dubai World’s $22 billion restructuring, signed in March. This restructuring will be a key advance for Dubai’s indebted state-linked firms.

Markets even rallied on news last month that the government had been forced to bail out one of the smaller lenders, Dubai Bank. Bondholders saw another sign that the state would protect Dubai Inc directly. The question now is whether markets are being too generous. Restructurings of around $10 billion each are still under negotiation for Dubai International Capital and Dubai Group: the investment arms of Dubai Holding, ruler Sheikh Mohammed’s personal conglomerate.

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