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Dubai rolls over $20b debt at 1% interest

Dubai-MarinaDubai refinanced $20 billion at a quarter of the original cost, freeing cash to service liabilities and fund expansion plans.

The emirate rolled over $10 billion of bonds owed to the central bank and a loan of the same amount due to Abu Dhabi’s government, and will pay a fixed interest of 1 percent on both, according to a statement on state-run WAM news agency yesterday. The rate is less than the United Arab Emirates’ 1.1 percent inflation for 2013, and half the inflation rate forecast for this year. The new debts are renewable after five years.

Dubai and its state-owned companies borrowed more than $110 billion developing the real-estate industry and transforming the emirate into a tourism and financial-services hub. Dubai, which announced plans to spend $8 billion gearing up to host the World Expo in 2020, faced $30 billion of maturities in 2014, according to International Monetary Fund estimates before yesterday’s deal.

“Now that they have refinanced a chunk of what’s due this year, the remainder suddenly looks much more manageable,” Khatija Haque, Emirates NBD PJSC’s Dubai-based head of research for the Middle East and North Africa, said in a telephone interview yesterday. “The interest rate is lower than we anticipated.”

The 1 percent rate is about 50 basis points less than the U.S. government pays on similar maturity debt. The sheikhdom originally borrowed the cash from its oil-rich neighbor and the U.A.E. central bank at 4 percent to help Dubai state-controlled companies through the global credit crisis. Both bonds were due to mature this year.

The agreement “should have a positive impact on lowering the cost of funding for Dubai and improving its credit worthiness,” Yaser Abushaban, executive director for asset management at Dubai-based Emirates Investment Bank PJSC, said by telephone yesterday. “It can now service its debt more comfortably.”

Dubai’s cost of borrowing has tumbled since the financial crisis. The emirate sold $1.25 billion of five-year Islamic bonds in 2009 priced to yield 6.396 percent, according to data compiled by Bloomberg. Last year it raised $750 million in 10-year sukuk at 3.875 percent.

The economy expanded 4.9 percent in 2013, the fastest pace since 2007 when it soared 18 percent. The cost of insuring Dubai’s debt against default was 200 basis points March 14, almost a fifth of the February 2009 figure, when concern over the emirate’s ability to repay its debts soared, according to prices compiled by CMA.

The agreements announced yesterday are part of “efforts to boost the competitiveness of the U.A.E. economy on both regional and international levels, and to reflect the upturns Dubai domestic economy has witnessed over the past few years,” according to the statement. “Signing of these agreements is consistent with the U.A.E.’s prudent financial policy which aims at supporting and promoting economic growth.”-Bloomberg