Dubai passes February debt test but more loom

Timely repayment of a $500 million bond owed by a unit of Dubai Holding, owned by the emirate's ruler, will please investors but the focus is on two larger Islamic bonds owed by state-linked firms maturing this year and whether Dubai will step in with financial aid.

The Gulf Arab emirate has clawed its way back from the depths of its crippling 2009 debt crisis, helped by a revival in trade and tourism and its safe-haven status amid the Arab Spring revolts.

But the emirate still faces a massive debt burden, with approximately $15 billion in bonds and loans maturing this year alone, according to the International Monetary Fund.

Dubai Holding Commercial Operations Group's (DHCOG), which along with its parent is part of the matrix known as Dubai Inc, on Wednesday announced the full repayment of the bond which was due February 1, using its own internal cash flow.

The DHCOG 2012 bond was bid at a price of 99.25 on Wednesday.

The bigger question centres on two Islamic bonds, worth $3.25 billion combined, issued by DIFC Investments (DIFCI), the investment arm of the firm that runs Dubai's financial free zone, and Jebel Ali Free Zone (Jafza).

"The first test for Dubai will be to meet its ($1.25bn) DIFCI commitment in June but the real test will be Jafza as it is the largest maturity and at the end of the line - after Dubai will likely have already provided substantial financial assistance to DIFCI," said Ghassan Chehayeb, associate director of Middle East research at Exotix.

Dubai will be loath to tarnish its reputation in debt capital markets and will push state-linked entities to honour traded debt. In 2009, it narrowly averted default on developer Nakheel's Islamic bond after Abu Dhabi threw it a last-minute lifeline. Since then, the emirate has been in recovery mode and issued two well-received government bonds.

"It is essential for Dubai to continue to have a good credit reputation to enable it to continue to access the international markets in future with reasonable borrowing costs," said Mohammed Ali Yasin, chief investment officer at CAPM Investment in Abu Dhabi.

The strategic importance of DIFCI and Jafza means the state cannot afford to let them fail, and current prices on their sukuk indicate investors are pricing in state support.

DIFCI's $1.25 bn Islamic bond maturing in June was seen at 96 levels while Jafza's November Dh7.5 billion ($2bn) sukuk was at 94.5 on Wednesday morning. Both have seen a steady recovery from October lows at 87-88 levels amid euro zone debt concerns.

"Although DIFCI and JAFZA have been less transparent than DHCOG in regard to voicing their commitment to creditors, we believe all Dubai public maturities will be honoured in a timely fashion," said Chehayeb.

Among bondholders are hedge funds, high-yield investors and distressed debt players.

COSTLY REFINANCING

Price action as the debt inches closer to maturity will be a key indicator of investor nervousness. Analysts say monetising assets quickly or financial support from the state are key for both entities.

Refinancing the DIFCI or JAFZA maturities through a new issue would require the companies to offer attractive profit or coupon rates on new issues, likely higher than that paid on their upcoming 2012 maturities.

"A number of European banks are cutting exposure to the Middle East due to liquidity issues and it is unlikely that the trend will change anytime soon," said John McWall, head of syndications at Bahrain's Arab Banking Corp. "Given the change in the creditor and borrower landscape, loan deal volumes look set to decline and pricing will stay relatively expensive."

Many Dubai entities are at different stages of addressing debt obligations. Much of the brunt of restructurings and refinancing is borne by local banks as global banks retreat.

While some relatively strong entities face an easier refinancing path, weaker ones will have a tug of war with the bankers.

In November, Dubai International Capital, a unit of Dubai Holding, agreed to $2.4 billion debt restructuring after a year of negotiations.

The cost of insuring Dubai's sovereign debt was hovering around 442 basis points on Wednesday, according to Reuters data. While spreads have tightened dramatically from highs of 645 basis points at the peak of Dubai's debt crisis in November 2009, the debt profile of Dubai Inc. continues to be on the radar screen of global investors.

"As far as the Dubai debt story is concerned, the refinancing risk - and the maturity of these three instruments (this year) in particular - is right at the top of the watchlist. No doubt about it," said Chavan Bhogaita, head of the markets strategy unit at National Bank of Abu Dhabi. (Editing by Stephen Nisbet)