Dubai set to raise $1.5 billion on return to public debt markets

The government of Dubai is expected to raise $1.5 billion through a dual-tranche bond issuance on Wednesday, its first sale in public debt markets in six years, as it seeks to boost finances hit by the coronavirus crisis.

Dubai is set to offer investors about 220 basis points (bps) over mid-swaps for 10-year sukuk, or Islamic bonds, and about 4.125 percent for 30-year conventional bonds, according to a document issued by one of the banks leading the deal and seen by Reuters.

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It received over $7.5 billion in orders for the debt sale, which is expected to close later on Wednesday.

“There is no value in the sukuk but there will be local buyers,” a fund manager said on the initial pricing, which was tightened during book-building by 30 bps for the sukuk and 25 bps for the conventional notes.

“For the 30-year, I’d rather own Bahrain or Oman - more risk, but I am paid for it. It’ll get done but I don’t see any upside,” the manager said.

Another fund manager said the pricing was “impressive” for Dubai. After a successful debt issuance by its wealthier neighbor, Abu Dhabi, last month, “it makes sense that they are able to issue at a discount,” he said.

The Middle East trade and tourism hub’s first public debt issuance since 2014 comes amid a sharp economic downturn that has revived concern over its finances and revived memories of the 2009 debt crisis that wobbled its economy.

Dubai has budgeted a $3.2 billion deficit this year, a bond prospectus showed.

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It also showed that while the government’s direct debt amounted to nearly $34 billion at the end of June, Dubai had no consolidated estimates for the outstanding total debt of government-related entities.

“It’s always been one of the big negatives of Dubai, but it’s really the worst-kept secret. Clearly the market doesn’t take the numbers at face value either,” a second fund manager said, adding spreads on Dubai’s existing bonds are not “commensurate with what the headline debt and deficit numbers suggest”. All the fund managers declined to be named.

Dubai is unrated, which may exclude a pool of investors from the debt offering, said advisory and research firm Azure Strategy.

“A rating process would require a more granular disclosure of Dubai’s credit profile,” it said in a report on Tuesday.

In July, ratings agency S&P said Dubai’s economy could shrink 11 percent this year, as it cut the credit ratings of two of the emirate’s biggest property firms to “junk” status.

The issuance comes as the United Arab Emirates and Israel work to promote investment between the two countries, after agreeing to normalize relations last month.