Monday, February 25, 2013

Dubai's DEWA issues sukuk, but eschews return to high leverage growth model

The Dubai Electricity & Water Authority (DEWA) is planning to issue a $1 billion sukuk, the proceeds from which will be used to repay a sukuk issued in 2008 that matures in June.  The last time DEWA sold any debt—conventional or Islamic—was October 2010 when it still had to pay a premium for being a part of the Dubai government (which owns 100% of DEWA).   Times have changed since this last issuance.  Its 10 year bond (with 7.375% coupon) and the 6 year bond (with 6.375% coupon) currently yield 3.99% and 2.78%, respectively, according to indicative prices provided by Zawya as of February 21, 2013.  Just five months at the Nakheel sukuk repayment came due, the trigger for the Dubai debt crisis, DEWA issued a 5-year bond for which it had to pay an 8.5% coupon, which is currently yielding just 2.32%.  

So debt is cheap and DEWA is jumping in, choosing sukuk because it offers greater value, CEO Saeed Mohammed al-Tayer told reporters: “We’re going for the cheapest option and sukuk is the cheapest now”.  At this point, one would be forgiven for developing concern that the Dubai debt binge is back on, with no lessons learned from the crisis which engulfed Dubai in December 2009 after the real estate bubble burst.  

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