Dubai's bond plan likely to target $1 billion first

Emirates Investment Bank chief executive officer Suresh Kumar speaks during the Reuters Middle East Investment Summit in Dubai, October 27, 2009.

DUBAI (Reuters) - The government of Dubai's fresh borrowing program is likely to raise an initial $1 billion through an Islamic bond to refinance debt held by the aviation department, said the head of Emirates NBD Capital, which is involved in the program.

Chief Executive Suresh Kumar told the Reuters Middle East Investment Summit that the first tranche, part of the $6.5 billion conventional and Islamic bond program launched last week, would set the benchmark for the rest and the pricing would have a spread of around 300 basis points.

"My sense is it will be focused on the Islamic certificate program to raise possibly $1 billion to be used to meet the maturity of the DCA (Department of Civil Aviation) sukuk," Kumar told the summit in Dubai.

"The initial response has been very good. This is likely to be done over a period of time and the intention is not to take all the money it takes in the book ... it has to be a benchmark."

Credit default swap rates for five-year Dubai debt stand at just below 300 basis points.

"This CDS, currently around 300 basis points, is a reasonable indication to expect the pricing to be around. But the response has been strong and if that's sustained it's likely that the financing pricing will tighten rather than widen from this level," Kumar said.

The government of Dubai launched a $6.5 billion bond plan last week, consisting of $4 billion euro medium-term notes (EMTN) and a $2.5 billion Islamic bond program.

DUBAI RISK

Emirates NBD is part of a group of banks involved in Dubai's borrowing program, whose roadshow is expected to conclude in London and Frankfurt later on Tuesday.

The latest move and healthy appetite from investors suggest that Dubai is making progress toward restructuring some of its $80 billion debt owed together with its government related entities (GREs).

The Dubai government says its aggregate direct debt stands at 71.27 billion UAE dirhams ($19.40 billion), according to the prospectus of the bond program.

"In addition ... the Dubai government has significant investments in certain GREs, which are principally held through ICD (Investment Corporation of Dubai) and Dubai World," it said.

"Investors should note that given the lack of consolidated reporting of the assets and liabilities of Dubai's GREs, the overall financial position and potential future financing requirements of Dubai's GREs may not yet have been fully identified."

It added that the government may decide to extend support to GREs in order for them to meet their debt obligations.

Kumar said GREs presented the perceived Dubai risk, not pure Dubai risk, given its huge debt. For example, property developer Nakheel has a $3.5 billion Islamic bond maturing in December.

($1=3.673 UAE dirhams)