Dubai sells $750m sukuk at 5%

Dubai tapped capital markets for the first time in more than a year with the sale of $750 million of 15-year Islamic bonds as the emirate seeks to pay debt and finance its budget amid a property-market recovery.

The Dubai government’s securities will price to yield 5 percent, according to a person with knowledge of the offering, who asked not to be identified because the details are private. The offering is Dubai’s first since it raised $1.25 billion from the sale of 10-year and 30-year bonds in January 2013.

Dubai, the second-biggest of seven members in the United Arab Emirates federation, has improved investor confidence since teetering on the brink of default more than four years ago. The city’s economy grew at the fastest pace since 2007 last year and its budget deficit is set to narrow by 41 percent in 2014 to 882 million dirhams ($240 million), according to official forecasts.

The price Dubai paid for the sukuk “indicates a significant improvement in the credit quality,” Yaser Abushaban, the executive director of asset management at Emirates Investment Bank PJSC, said by e-mail today. The price “is a result of improved economic fundamentals and a positive growth outlook in Dubai, including in real estate,” he said.

The sale comes after Abu Dhabi agreed last month to roll over $20 billion of debt for five years, helping push Dubai’s credit risk to 165 basis points on April 4, the lowest level since 2008. Five-year credit default swaps, which insure Dubai’s debt against non-payment, traded at 168 basis points yesterday, compared with a peak of 942 in 2009.

Today’s offering was fairly priced, according to Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd. “Its timing is good as interest rates are relatively low and volatility has eased in bond markets,” he said by e-mail today.

The yield on the government’s Islamic bonds maturing in January 2023 fell 59 basis points, or 0.59 percentage points, this year to 4.14 percent at 7:04 p.m. in Dubai. The debt complies with the religion’s ban on interest.

Property prices will jump 40 percent in Dubai this year, according to forecasts of the emirate’s Land Department.

Dubai, which is not rated, sold $750 million of 10-year sukuk in January 2013 that priced to yield 3.875 percent and $500 million of 30-year non-Islamic bonds yielding 5.375 percent. It has a $1.25 billion sukuk maturing in November.

Dubai Islamic Bank PJSC (DIB), Emirates NBD Capital Ltd., HSBC Holdings Plc (HSBA), National Bank of Abu Dhabi PJSC and Standard Chartered Plc managed today’s sale, the person said.-Bloomberg