Dubai issues $1.93 billion in sukuk

Dubai announced the results of its 5-year sukuk issuance today. There were two tranches, one for $1.25 million of USD-denominated sukuk and the other was $680 million in AED denominated sukuk. The sukuk were priced at 375 basis points over mid-swaps. Bloomberg reports that the USD sukuk were priced to yield 6.39%. The AED tranche are floating-rate notes based on a spread over EIBOR, priced to yield 5.65% according to the same Bloomberg article.

The nearly $2 billion issuance is the first issuance of bonds by Dubai since April 2008, before the real estate markets in Dubai began to tumble in the wake of the global credit crisis. There are a number of maturing debt issues--some $6.8 billion in the fourth quarter of 2009--none more crucial to Dubai's reputation than the $3.52 billion Nakheel sukuk. The Nakheel sukuk is not officially sovereign debt, but it is a government-related entity guaranteed by Dubai World, the government-linked holding company.

Nakheel, the developer of the palm-shaped islands off the coast of the Emirate, has run into severe difficulty following the property crash in Dubai, and has confirmed it has received money from Dubai's Financial Support Fund, although the amount has not been disclosed. Although the funds raised in this sukuk issuance will go to the government, in part to pay maturing sovereign sukuk, there will soon be another $10 billion bond issuance, a part of the $20 billion bond program that was started with a $10 billion bond issued to the UAE central bank.

Nakheel has been reported to be in restructuring talks over the $3.52 billion sukuk, which could include a tender offer involving equity. However, a number of investors have publicly criticized the possibility of recieving equity for their investment. Due to the deferred lease payments throughout the sukuk, the total amount payable on maturity is around $4 billion. Were the Nakheel sukuk to not be fully redeemed upon maturity, it would send a bad signal to the bond markets about the credit-worthiness of other highly-indebted government-related entities and could affect the Dubai government's ability to raise future debt.

However, the ability of Dubai to access the international capital markets, as well as the support from the UAE central bank through the earlier bond, sends a positive signal that Dubai will not allow Nakheel to default on its debt. The outcome is still uncertain, although the secondary market trading in Nakheel suggests that there will be a favorable outcome. The latest pricing is 107 - 108.5 as of October 28th. The final maturity value of the Nakheel sukuk is near 115.

Other News

• Indonesia plans its next sukuk in mid-November. The first two auctions have seen investors demanding higher yields. The first auction had all bids rejected and the second auction saw less than 5% of the total bids accepted.
  
• Jordan continues to consider issuing a sukuk, although the discussions are in an early stage.
  
• Next year may see $20 billion in sukuk issuance according to a poll. The issuance was $9.3 billion in the first seven months of 2009. The total sukuk issuance this year could be around $15-17 billion. However, with a pipeline estimated at $45 billion, this would be less than some expect.