Although Dubai bonds have outperformed some high-grade Abu Dhabi credits, thin liquidity, lack of supply still put them at risk.
A year-end rally in Dubai-related bonds sends a positive signal for 2012, suggesting more investors are becoming convinced the emirate can arrange smooth refinancings for state-owned firms next year. But there are still major doubts.
Government-related entities in Dubai have bonds worth $3.8 billion (Dh13.95 billion) maturing in 2012. With the real estate market still soft, the stock market uncertain and many banks reluctant to lend because of global financial instability, investors have worried that some of those bonds might be restructured, with changes to repayment terms that disadvantage creditors.
Such speculation prompted Shaikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee, to declare on December 7 that restructuring was not on the cards, though he said the government might look into refinancing part of the debts, presumably through issuing new bonds or loans.
"There is no truth to reports being circulated about an intention to ‘restructure' certain debts owed by the Dubai government companies in 2012," Shaikh Ahmad said. The ensuing slide in bond yields for all three of the companies with debt maturing next year shows the Dubai government still commands a substantial amount of trust in the market. Article continues below
window.onload=initial; "We have seen some positives. Names such as Jafza [Jebel Ali Fre Zone Authority] have seen buyers. That goes for all Dubai HY [high yield] recently," said a Dubai-based fixed-income trader. Dubai credits have outperformed many high-grade bonds in the UAE as the year draws to a close. The yield on Jafza's Dh7.5 billion sukuk maturing in November has dropped from 13.50 per cent on December 6 to 12.19 per cent.
Jafza's chairman told Reuters this month that the company was confident it could refinance the sukuk without government aid and was already in talks with bondholders about that. He did not rule out asset sales to raise funds. DIFC Investments' 0.713 per cent, $1.25 billion sukuk comes due in June. Its yield has dropped from 19.32 per cent on December 6 to 16.57 per cent.
The third Dubai company with debt maturing next year, Dubai Holding Commercial Operations Group has said it will repay in full and on time its 0.804 per cent, $500 million bond maturing in February. The yield on that is at 16.22 per cent, down from 18.07 per cent on December 6. By contrast, the yield on a top Abu Dhabi credit, Abu Dhabi National Energy Co's (Taqa) 5.62 per cent, October 2012 bond, has risen to 2.23 per cent from around 2.10 per cent since December 6. The origins of the Dubai rally are more complex than simple optimism about refinancings, however. Thin trading turnover at the year-end may to some extent have distorted prices. "We saw better buyers on thin liquidity, which has driven prices up more than usual," the Dubai trader said. A sudden halt in new bond supply, after Taqa's $1.5-billion issue in early December, may also have boosted prices. Several UAE companies including some from Dubai were originally looking to issue after Taqa but did not proceed as the year-end issuance window closed.
In addition, Dubai bonds' trading levels are in some cases less impressive than they might seem. DIFC Investments' bond yield was at 14.52 per cent at the start of December before a burst of speculation about a possible restructuring pushed it up sharply. In price terms, DIFCI is trading at 93.20 bid and Jafza at 93.75 bid — levels that still suggest considerable concern about the terms on which the bonds may be retired. When Dubai Group announced it needed to renegotiate its debts last year, the company said it would continue to service them. Dubai Group expects to provide further details of its efforts in coming months, a spokeswoman said. Drydocks World, a unit of Dubai World, expects to complete its long-delayed debt restructuring by the end of March 2012, its chairman said this week.