Investors have been closely watching the emirate's move ever since Dubai Worlddefaulted on that grim Eid weekend of November 25, 2009, and since then the emirate has no longer been the darling of bond investors.
Dubai would argue that much water has passed under the bridge since then. Dubai Worldhas made up with its creditors and put into place a robust debt plan. Meanwhile, other Dubai entities have been paying their dues or agreeing to rollover maturities in happy agreement with their creditors.
Exotix, a frontier market investment banking boutique, notes that 18 months after Dubai World's standstill request caused global shockwaves, the emirate has become the focal point of MENA's April rally, itself the strongest in a year.
"Dubai sovereign spreads have tightened over 133bp since 16 March, and over 188bp since the spike on 30 November 2010, itself induced by Dubai Holding seeking extensions on credit lines," wrote the bank in a report on Dubai a month ago. Since then spreads have tightened to around 384 bps, as the emirate rapidly declines from its ranking as one of the top five sovereigns most likely to default.
In addition, Abu Dhabi stepped in Dubai's hour of need and offered $20-billion - we believe there is more where that came from. Since the arrival of the Arab Spring, there is even more reason to believe that Abu Dhabi will not let a major default occur as it would be loathe to face any political fallout due - in short it will take on the moral hazard if need be.
Still, the markets have not forgiven Dubai. In the first quarter, Dubai remained among the 10 most likely countries (or city states) to default, according to CMA Datavision, which tracks credit default swaps (CDS) and bond pricing based on data data provider CMS.
(Read: Middle East Sovereign Debtors Seen As Among Riskiest By Global Investors)
Standard Chartered Bank sees 2012 as a crucial year for the emirate.
"Dubai faces an onerous debt redemption schedule over the next few years," notes the bank in a note. "While the restructuring at Dubai World has bought the emirate some time, it has done little to address the absolute size of its outstanding debt as there have been no meaningful haircuts and few (publicly disclosed) asset sales."
It is important to differentiate that most of these maturities are loans, which are easier to handle, than bonds which are more widely held.
The bank expects Dubai to service the 2012 maturity bonds as the emirate needs to frequently access international capital markets.
"We expect that Dubai will use the same template as that used for the Dubai World/Nakheel restructuring - i.e., servicing the bonds and restructuring the loans - in dealing with the 2012 bond maturities. However, we anticipate that external assistance could be required, particularly to deal with the larger maturities," says Standard Chartered Bank.
Standard Chartered Bank's point about it needs to regularly access capital markets is important.
Dubai has built up its excellent infrastructure of roads, railways and airport via debt, and given the emirate's ambition of being an unrivaled regional hub, it will need to continue to seek loans and raise bonds.
On June 2, Emirates airline, the city's ambitious plan successfully raised a five-year $1-billion bond with a coupon of 5.125%, implied Z-spread of around 355bps - which is inside the Dubai sovereign range and wide to DEWA and DP World.
"Emirates should eventually settle at a level between DP World and the sovereign (the spread differential between the two on the curve is currently about 50bps)," says Standard Chartered Bank.
"Given the current price whisper, we see some upside (20-25bps) for Emirates at these levels, particularly given the recent strong momentum behind GCC credit - spreads in Dubai have tightened about 80-100bps since the beginning of the year (Chart 1). However, unlike DP World and DEWA, Emirates is unrated (as is the Dubai sovereign), which could prevent some investors from getting involved in the deal."
Fragilities Exist
The support from Abu Dhabi and the UAE's renewed status as a safe haven in the political shamal that is blowing across the region has helped tighten Dubai's spreads.
"But fragilities still exist, so the rally has, in our opinion, nearly drained the oasis," notes Exotix.
These outstanding risks include:
The property overhang;
(ii) lack of clarity on GRE finances;
(iii) international sanctions on Iran, a traditional source of demand for Dubai real estate;
(iv) regional instability;
(v) increased regional vulnerabilities to an oil price decline - given increased spending commitments;
(vi) general underprovisioning by Dubai's banks, and;
(vii) a challenging bond refinancing cycle in 2011 and 2012.
As Standard Chartered Bank hinted, Dubai may still need "external support". The Dubai Financial Support Fund (DFSF) may need another injection of funds and Abu Dhabi may have to step in.
"This will depend on the GREs' - government-related entities - ability to further restructure bank debt, refinance upcoming bond maturities with new bond issues or secured bank debt, and their continued willingness and ability to sell down assets," noted Exotix in its report.
"As of 27 September 2010, the Government of Dubai stated that there is US$2.7bn remaining to be drawn from the DFSF from the loans provided by Abu Dhabi and its banks in December 2009."
The GREs have shown a willingness to sell assets. For example, in August 2010, Dubai World told creditors that potential asset sales over the next eight years may generate as much as US$19.4bn. In December 2010 DP World sold 75% of its stake in its Australian unit (US$1.5bn value) and Borse Dubai sold 50% of its stake in Nasdaq OMX for US$672 million, notes Exotix.
"We continue to believe that, although it has been mentioned as a last resort, the Government of Dubai and its GREs would even be willing to sell partial stakes in their prized assets (e.g. Emirates Airline, Jumeirah Group, Dubai Maritime City, and Jebel Ali Free Zone) to avoid defaulting on their bonds, the possibility of which led to great public embarrassment and financial repercussions experienced during the Dubai Worldstandstill."
What's Due In 2012
Standard Chartered bank examines the likely path to debt servicing for the three main Dubai entities - Jebel Ali Free Zone, DIFC Investments (DIFCI) and Dubai Holding COG (DHCOG), that will collectively see around $3.75-billion combination of bonds and loans coming to maturity in 2012.
JAFZA:
"JAFZA clearly does not have the ability to repay the AED 7.5bn sukuk from internal sources. Monetisable assets are few, as the company does not own the land forming part of its facilities in Jebel Ali. Refinancing the entire sukuk at current yields would likely push the company into a loss. With sustainable debt in the range of AED 4.7bn, we believe JAFZ will ultimately have to rely on an external equity infusion in order to make its capital structure more sustainable. With a stronger balance sheet, the company could explore various refinancing options given its stable revenue stream."
DIFCI: "DIFCI's ability to service its debt depends on the success of its ambitious USD 1bn asset-disposal programme and ongoing government assistance. Given fairly low earnings from its core operations, the company is constrained with respect to the total debt it can support on a sustainable basis. Sovereign support for the credit is strong with the government having already provided the company with two USD 500mn loans (whose maturities have already been extended and we expect they will ultimately be converted to equity)."
DHCOG:
"Of the three 2012 maturities, Dubai Holding is relatively better placed to service its debt from internal sources given the smaller bond maturity (USD 500mn) and some monetisable assets. Assuming external sources of funding are not called upon, the company's telecoms portfolio is a potential source of raising cash. Its investments in listed telecoms companies (du, Forthnet and GO) are worth close to USD 1bn. This is in addition to its largest telecoms investment - 35% of the unlisted Tunisie Telecom, which it purchased in 2006 for USD 2.25bn."
These are the most high-profile maturities, but they are by no means the only one. Total Dubai debt in 2012 - including government-related entities, or GREs - stand at $15.2 billion, according to IMF data.
On May 24, we focused on Dubai's debt burden and the IMF warning that the emirate's debt will rise to 53% of GDP by 2016 if it does not act.
The Standard Chartered Bank and Exotix reports and the Emirates airline bond issue suggests Dubai is climbing over its debt mountain.
"Barring any more nasty GRE surprises or globally exogenous shocks, we expect Dubai's refinancing environment to remain favorable over 2011 and 2012," notes Exotix.
© alifarabia.com 2011
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