Has Dubai turned a corner?

LONDON, Feb 10 (IFR) - Dubai Inc's sizeable 2012 debt maturities have been viewed with trepidation for some time but a good start to this year has improved sentiment around even troubled credits.

The three most challenged borrowers were Dubai Holding Commercial Operations Group (DHCOG), Dubai International Financial Centre Investments (DIFCI) and Jebel Ali Free Zone (JAFZA), which faced maturities totalling about USD3.75bn.

Promisingly Dubai passed its first big test when DHCOG, a unit of Dubai Holding, which is owned by Dubai ruler Sheikh Mohammed bin Rashid, paid its USD500m obligation a few weeks ahead of its February due date. "There is a key distinction to make between a refinancing and a straight repayment," said a Gulf-based analyst. "DHCOG managed to pay down its obligation through operating cashflows and divestiture of non-core assets, implying credit quality. Dubai Inc risk decreased as a result."

However, challenges remain. DIFCI has USD1.25bn bond due in June, while JAFZA has a USD2bn-equivalent local-currency sukuk maturing in November. JAFZA is reported to be in talks with banks over its repayment options, which may include a fresh sukuk and a syndicated loan, sources say.

"I wouldn't expect huge international appetite for DIFCI's and JAFZA's debt, but between banks and domestic sukuk it is clearly manageable,"" said one syndicate official. "There is a feeling that we're not out of the woods yet, but people are more relaxed."

Catch a bid

This is reflected in trading levels for DIFCI's and JAFZA's bonds, which were quoted in the market last Thursday at 97.00-97.25 and 95.25-95.75 respectively. Both DIFCI and JAFZA are catching a strong bid, traders say, despite the fact that DIFCI in particular has given little indication of how it plans to meet its redemption.

While there is no explicit government guarantee for debt issued by either entity, their economic and symbolic importance to the emirate is such that few bankers expect any problems with their refinancings. "Look at this place - it's the symbol of Dubai's growth story," said one analyst, sitting in the DIFC. Meanwhile, an estimated 20% of Dubai's GDP is generated through JAFZA.

One option could be for the sovereign to raise funds and then use them to especially support DIFCI. This wouldn't necessarily have to be a straight bond but could be money raised through asset sales, a loan or a securitisation, following its successful Salik toll road deal which raised USD800m last year. "Investors are more constructive on Dubai risk," said the syndicate official, pointing to recent fundraising by new issuers Majid Al Futtaim and Tamweel.

Yet not all are convinced, especially about DIFCI's prospects. "I don't know what's driving this sentiment," said one trader. "Would I buy DIFCI for three points of upside? Probably not."

He added: "DIFCI will most definitely need a government bailout. We hear that one option is for the Investment Corporation of Dubai [an arm of the government] to buy their entire investment portfolio." DIFCI did not respond to IFR's request for comment.

(Reporting By Isla Binnie; editing by Sudip Roy and Owen Wild)