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Thursday, 2 July 2009

Dubai's 2nd $10B Bond May Be Backed By UAE Government-Source

The government of the United Arab Emirates may guarantee Dubai's second $10 billion bond to help boost confidence in the struggling emirate, according to a government official familiar with the matter.

"It will be the first time an emirate's bond has been backed by the federal government," the Dubai official, who is involved with the bond told Zawya Dow Jones.

Dubai is seeking federal support to help sell the bond to international banks who otherwise may be reluctant to buy the debt as the emirate continues to restructure its finances. The bond issue will be the first by Dubai backed by the federal government.

In February, Dubai's Department of Finance issued the first half of the bond program totaling $20 billion, all of which was subscribed to by the U.A.E. central bank.

A Department of Finance spokesperson declined to comment.

The bond program is aimed at raising much-needed funding for Dubai to help refinance debt of government-affiliated companies hit by the global financial crisis.

Dubai is one of seven emirates that make up the U.A.E. Most of the country's oil wealth comes from Abu Dhabi, which holds 90% of its crude reserves.

Federal government backing for Dubai's second $10 billion tranche is seen as a key confidence building measure and is likely to boost investors' appetite and help the emirate secure more attractive pricing.

"Investors continue to require a large premium to carry the risk of Dubai-based entities," Mohamed Jaber, an economist at Morgan Stanley said in a note Monday.

While part of the drive behind tapping financial markets is aimed at boosting confidence, the central bank may also be too hamstrung to commit the cash, a person familiar with the matter said.

The bond, which will be issued later this year, is expected by analysts to hit the market before real-estate firm Nakheel, the developer of Dubai's iconic palm islands, needs to refinance a $3.5 billion bond in December.

Like many of its neighbors, Dubai wants to spend its way out of the global economic crisis. Its 2009 budget will see the emirate's first-ever deficit of 4.2 billion U.A.E. dirhams ($1.14 billion), with government spending up 42% on the previous year.

The bond program will support government spending plans and the private sector at a time when loans from international banks have dried up as global lenders have become too nervous to lend. At the same time, local banks are grappling with a large loan-to-deposit gap of about AED90 billion. The bonds are being used to help fill in the gaps.

"We expect this to be issued before the end of 2009 however it really depends on when it is required," said Ali Ibrahim Mohammed, the deputy director general at Dubai's Department of Economic Development. "The response is sure to be positive and will again raise confidence in the market."

He declined to comment on federal backing for the bond. The U.A.E.'s finance ministry also declined to comment.

In the second-quarter this year, Gulf companies and governments raised about $9 billion through bonds as they grapple with an oil price slump from an average $99 a barrel in 2008.END

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