Last week’s $1.25bn sukuk issue from Dubai showed how far the emirate has come since its financial crisis of 2009, when government investment firm Dubai World shook markets with its move to delay $26bn of debt.
The $4.6bn order book for the Dubai sukuk suggested that there were plenty of buyers who had little trouble putting aside the history — and were not put off by the issuer's lack of a rating. Not only that, but the deal's 10 year tranche also gave a big fillip to the prospects of longer term borrowing in the Islamic market.
This might be seen as cause for rejoicing, and it is undoubtedly evidence of progress. But it would be rash to draw too many conclusions too quickly. Turn-out by real money and Asian investors was low in the Dubai deal. There is a limit on how much comfort other unrated borrowers can take from the news.
This matters because debt issuance from rated and unrated issuers from the region is increasing, whether to fund growth or to help refinance past burdens. And there is plenty more to do.
No fewer than 11 government-related restructurings, totalling $34bn, have been launched in Dubai since the 2009 crisis, according to Exotix. Six are now done, but talks are still under way over $12.2bn of debt for Dubai Group, Drydocks World, Zabeel Investments, Dubai Holding Investment Group and Limitless.
Away from the restructurings, much of the focus of attention is on single-B rated Jebel Ali Free Zone and Dubai International Financial Centre — both of which need to refinance sukuk maturing this year ($2bn for Jafza, $1.25bn for DIFC) and are thought to be close to announcing how they will do so.
They should all take heart from the longer dated funding that Dubai was able to get, with just over half the deal coming in the 10 year tranche. The recent Saudi Electricity Company sukuk was even more striking, with $1.25bn of the $1.75bn deal sold as 10 year bonds. Deals like this are great news for borrowers that need to establish their own more developed curves.
But the market needs to guard against pushing too hard, too soon. Dubai — being well known and well analysed — may have been keenly bought, but other unrated or low rated borrowers will find the going harder. That is all the more true for issuers in the emirate itself, like Jafza and DIFC: the government has made clear that it will not act as a backstop.
The low participation in the Dubai deal by real money accounts must also not be brushed aside. The lead managers rejected suggestions that allocations to real money (just 16% of the five year) might have been kept deliberately low in order to encourage a more liquid secondary market. In that case, the likely explanation is that the lack of a rating did indeed lock many out.
The geographical scope of the investor base also showed its limits. There was some European interest in Dubai, but the bulk of the deal went to the Middle East — as much as three quarters of the five year. The Asia allocation to Asia — where sukuk investors care much more about credit quality than absolute return — was in the single digits.
Even without a rating, the emirate is viewed as a very different credit to its corporates. Investors mostly believe that the emirate still has the backing of its neighbour, Abu Dhabi, which provided a $10bn lifeline in the teeth of the 2o09 crisis.
But the same does not apply to other issuers, even those with close connections to the government. It will be tempting to read much into Dubai's success, but ambitions need to be tempered by reality. A few failed issues will set the region back a long way.