UPDATE 1-Dubai to issue 10-year dollar sukuk on Tuesday
* Dubai to raise at least $500 mln from sukuk sale
* Price guidance at low 4 pct area, demand seen strong
* HSBC, NBAD, Stanchart, Dubai Islamic and ENBD on deal
* Emirate to benefit from low borrowing costs, economic revival (Adds detail, background)
DUBAI, Jan 22 (Reuters) - Dubai will sell a 10-year Islamic bond, or sukuk, of least $500 million in size on Tuesday, arranging banks said, using its first big debt issue of 2013 to lock in low borrowing costs.
Dubai Islamic Bank, Emirates NBD, HSBC Holdings, National Bank of Abu Dhabi and Standard Chartered are arranging the sukuk.
The emirate last tapped markets in April with a $1.25 billion sukuk sold in two tranches, its first such sale since a debt crisis in 2009 that undermined investor confidence. Dubai also issued interest-bearing dollar bonds in 2010 and 2011.
The new issue, which according to its prospectus will be Dubai's only 2023-dated bond, will help lengthen the average maturity of the government's debt.
Pricing is expected to be in line with Dubai's $650 million 2022 sukuk, issued last April, which was yielding about 4 percent on Tuesday - much less than its yield at launch of 6.45 percent.
That equates to a z-spread of about 230 bps, traders said. The z-spread is a pricing tool that calculates the number of basis points that need to be added to a zero-coupon yield curve to make the bond's discounted cash flows equal the bond's present value.
Market sources said orders for the sukuk were already seen at more than $4 billion at 0830 GMT. Strong demand for the deal could allow Dubai to raise $1 billion or more.
"Given the liquidity and the demand for the paper, I would not be surprised if the issuer could issue the paper at 4 percent," said one regional fixed income trader.
Unrated Dubai, which boasts the world's tallest building and islands in the shape of palm trees, rocked global markets in late 2009 when state-owned conglomerate Dubai World announced a $25 billion debt restructuring. The crisis coincided with a dramatic collapse of the emirate's property market.
Dubai has striven since to regain its credibility among international investors, successfully refinancing or restructuring debt and benefiting from its status as a regional safe haven amid the Arab Spring civil uprisings.
The cost of insuring its debt against default, a measure of investor confidence, has fallen to multi-year lows, with five-year credit default swaps trading at 211 basis points on Monday.
Dubai expects its economy to grow by more than 4 percent in 2013, slightly more than is forecast for last year.
Dubai's direct government debt as at 31 December 2012 was 122 billion UAE dirhams ($33.21 billion), according to the sukuk prospectus. In 2013, it faces public debt maturities of 6.5 billion dirhams ($1.77 billion) according to the prospectus.
The total portfolio value of Dubai's main investment fund, the Investment Corporation of Dubai (ICD), stood at 20.7 billion dirhams for listed companies, including stakes in Emirates NBD and Emaar Properties, and 87.7 billion dirhams for unlisted companies, which includes Emirates airline.
Dubai Inc entities including state utility Dubai Electricity and Water Authority are expected to tap debt markets after the sovereign to take advantage of low borrowing costs.