Amid fears that it is already overly indebted, the image-conscious Dubai government has embarked on its largest bond programme ever. The local-currency bonds will be used to fund improvements to Dubais choked transport infrastructure, in particular through a new metro and international mega-airport.
The Dubai metro is getting some funds by selling the names of its stops and lines to corporations. Local (mostly government-owned or backed) brands might be keener on the offer. But the prospect is nevertheless set for a journey from McDonalds to Ford, via Gap.The plain-vanilla bonds are perhaps less revolutionary in structure. A first tranche of $1.8 billion was issued in mid April, consisting of $700 million in five-year, fixed-rate notes with a coupon of 4.25% and $1.1 billion of floating-rate notes priced at 0.5% over the three-month local inter-bank rate. A banker close to the deal tells Euromoney that a second tranche will cover the rest of the $4 billion programme, unless demand is insufficient, in which case a third tranche might be necessary.
Standard Chartered and local bank Emirates NBD are arranging the deals. The debt comes as part of a transport infrastructure investment programme of $14.3 billion over the next five years.
According to Bernhard Solleder, head of corporate finance advisory at Emirates NBD, the government decided to issue in local currency in order to boost the local capital markets. "The domestic capital markets are at an early stage and it is important to develop them," he says.
But other sources say that the governments main concern was the lack of demand for dollar-denominated debt in the Middle East, where most of the transaction was placed.
All but one (Kuwait) of the six Gulf Cooperation Council countries maintain a peg of their currencies to the dollar. And as these oil-based economies boom, the US Federal Reserve is cutting interest rates, forcing Gulf central banks to do the same. They could be doing the opposite, so inflation is high, and there are calls to swap the dollar peg for a basket of currencies, or else to revalue. In the UAE, hedge fund speculators have been flooding into the dirham.
One source says comments last month by Sheikh Mohammad, the ruler of Dubai, reaffirming the dirhams peg to the dollar, caused a multi-billion dollar flow of capital out of the UAE currency just a few days before his government launched the bonds.
But Robert Whichello, head of European and emerging market debt syndicate at BNP Paribas, says Emirati issuers, particularly financial institutions, have already adapted to currency speculation by issuing more short-term local-currency debt.
"Entities in the Gulf are finding it increasingly difficult to issue in dollars. There just isnt the investment appetite owing to speculation over revaluation and the low return you get for dollars right now," says Tristan Cooper, senior analyst in sovereign risk at Moodys.