Dubai Sukuk Gets $14.6 Billion Push Toward Record Rally

By Zainab Fattah, Stefania Bianchi and Samuel Potter

Dubai bondholders are getting a $14.6 billion reason to drive the sheikhdom’s securities to fresh records.
Yields on the emirate’s dollar sukuk due in May 2022 fell eight basis points yesterday to 3.43 percent, within five points of a record low, as Dubai World reached a deal with a majority of creditors to reorganize about $14.6 billion of debt. As part of the agreement, the company will repay $2.92 billion due this year early, and extend obligations maturing in 2018 to 2022.
The restructuring marks further progress for Dubai in putting the 2009 financial crisis behind it as the United Arab Emirates’ sheikhdom benefits from a recovery in real estate and tourism. At the same time, it still owes more than $135 billion to creditors, according to International Monetary Fund estimates.
“This will only enhance Dubai’s ability to borrow,” Abdul Kadir Hussain, chief executive officer at Mashreq Capital DIFC Ltd., who oversees about $1.2 billion in assets, said
by phone from Dubai yesterday. The deal “essentially removes uncertainty over the debt in the next few years,” he said. “The fact they are paying part of the debt early even though it’s a small part is a positive.”

$110 Billion

Dubai World pledged additional collateral and increased pricing as part of the agreement, without giving further detail, according to an e-mailed statement from the company yesterday.
Dubai and its state-owned companies borrowed more than $110 billion developing its real-estate industry and transforming the emirate into a tourism and financial-services hub, according to IMF estimates. Dubai World was at the center of the sheikhdom’s 2009 financial crisis when it sought a debt delay as credit markets froze and asset prices slumped globally.

Decree 57

The holding company plans to seek court approval for the agreement through a Decree 57 process, a special tribunal relating to Dubai World. The decree requires that at least 66.67 percent of creditors by value approve the deal, with the company saying it has already exceeded that threshold.
“The truth is that Dubai World would have made a much greater impact had the restructuring gone through without the need to apply Decree 57,” Ahmed Shaheen, associate director of fixed income sales and trading at Exotix Partners LLP in Dubai, said by e-mail yesterday. “Resorting to Decree 57 is the nuclear button and it’s really a shame that after five years since emerging from the worst credit crisis in our lifetime we are seeing Dubai resort to such drastic measures to push through more debt restructurings.”
Drydocks World LLC, part of Dubai World, used the tribunal in August 2012 to sanction a $2.2 billion debt restructuring after failing to win support from all lenders.

Done Deals

The emirate has since completed a series of debt negotiations, helping reduce its credit risk profile.
Shariah-compliant mortgage provider Amlak Finance PJSC in August reached an accord to restructure $2.7 billion. Dubai Group LLC, another state-owned holding company, rescheduled its liabilities earlier in 2014, while Limitless LLC, a Dubai-based property developer, has asked for a three-month extension on a loan repayment due last month, two people with knowledge of the matter said.

‘Amenable’

The cost of insuring Dubai’s debt against default were at 245 basis points yesterday compared with more than 900 basis points in February 2009, CMA prices show.
Dubai World signed a deal with about 80 creditors in March 2011 to restructure about $14.7 billion of bank debt, agreeing to pay an average fixed interest rate of 2.4 percent on the loans. Banks including HSBC Holdings Plc (HSBA), Royal Bank of Scotland Group Plc, Standard Chartered Plc (STAN), Emirates NBD PJSC (EMIRATES) and Abu Dhabi Commercial Bank PJSC (ADCB) are among the company’s biggest creditors.
The discussions with creditors “were known to be quite amenable in contrast with a few years ago,” Richard Segal, head of emerging-market credit strategy at Jefferies International Ltd., said by phone from London yesterday. Back then, Dubai “had never had to do anything like this and it wasn’t so experienced. Now it understands the debt restructuring and financing process a lot better,” he said.
“If the government or some of its related entities wanted to return to the bond market, this should make that process a lot smoother,” Segal said.