Dubai recovery no mission impossible with $1.75bn bond sales
Posted on 30 September 2010 with 2 comments from readers
The Dubai Government has returned to the global debt market raising a $1.25 billion bond issue in the same week that Mission Impossible 4 announced that it would shortly begin filming in Dubai. And Emaar Properties has raised up to $500 million in a convertible bond issue.
With Tom Cruise in town anything may be possible. The local stock market is up 16 per cent from its summer low. Tourist numbers are rising and the roads much busier. There were 1,188 real estate transactions in the first half of this year, double the number in the second half of 2009, but 500 projects have been cancelled.
Recovery mission
This bond issue is an international recognition that Dubai is ‘back’ as the ruler Sheikh Mohammed bin Rashid Al Maktoum told Bloomberg. Work is restarting on some stalled projects, although on much slower time schedules.
The bond has been sold in two tranches: $500 million maturing in five years at 6.7 per cent and another $750 million at 7.75 per cent that matures in 10 years, according to wire reports which said investors bid for more than $5 billion.
Demand for emerging market debt is sky high at present with investors seeking the supposed security of bonds and their higher rates of interest at a time of uncertain prospects for global stock markets as the economic recovery slows. Are investors jumping onto the right ship?
Certainly market watchers have noted that in the past Dubai has a good record of selling assets for high prices rather than offering bargains. The $5 billion Dubai Ports World IPO springs to mind. Are emerging market bonds another bubble about to burst?
Money printing
Of course, this has nothing to do with the Dubai recovery story. It is all about the Federal Reserve and its money printing policies. Bond markets crash when the amount of issuance passes a critical point and the bond issuer’s ability to pay is called into question. Some believe the US is nearing that point, and then bond holders are going to demand much higher rates of interest.
When interest rates go up the price of bonds comes down. This is often misunderstood and muddled even by professional investors. So if bond prices fall then the $1.25 billion Dubai bond will be cheap money, even if some say the yield is high today.
No wonder then that Dubai has been in a rush to get its bond issue away. Global financial markets can be fickle friends and it can be wise to take the refinance and run. If at the same time Dubai can signal that its recovery is no mission impossible then so much the better.
$45m Emaar bond
Meanwhile, leading Dubai property developer Emaar Properties announced that it has successfully placed a $450 million convertible bond issue at 7.75 per cent with a conversion price of $1.293 per share. The bond will be listed in London and Luxembourg and refinance short-term debt obligations and potential losses at Amlak Finance, the frozen Islamic home loan company in which Emaar has a 48 per cent stake.
The bond matures in December 2015 and has an over-allotment option of $50 million which would bring the total raised to $500 million. Again tapping the bond market at this point in time makes eminently good sense for Emaar.
2 Comments posted by readers:
This could be the future bond crash. If they are unable to pay off any debts now what makes others think that they will be able to pay them off in the future?? If they have not changed any of their policies now what makes one think that they would in the future either?? I don’t know about others but I would never buy any of these government bonds. Look at all the people trying to collect their debts now and no one was able to collect. The are being promised interest rate payments after 7 years lol..
Unless the entire world economy melts down, which I don’t expect until the mother- of- all peak oil crash, strikes around 2016, so much money will flow into the MEPS region that any current problems in Dubai are trivial.
Within 4 years, oil will be at least $150 a barrel, and trillions will be flowing into that area. Finding a way to invest all the money will be their biggest problem. A China stock market bubble might be blown. But I suspect the investors in the area are smart enough to not put too much of their money in one country, especially one which lacks the rule of law. I wish I could sit around and think, ‘How am I going to invest all this money?’ No doubt gold will get a lot of it.
Of course, I am assuming no regional war occurs. With the planned enormous arms sale just announced, I think the more radical elements in the area will think twice before trying to expand into Iraq, which is the last treasuretrove of cheap oil left on this planet. Hundreds of F-15s can drop a LOT of bombs. Missiles are an expensive one shot weapon. Jets can hit you again and again. And with the new bombs with the little wings and rocket motors on them, the planes don’t even have to get anywhere near where the bomb will hit. That makes the planes quite difficult to shoot down. Talking is a lot better option.
Check out a graph of the Dow this morning. What did Ben say to cause THAT downturn? Oh, I see it was a weaker than expected Chicago PMI number.
Bill Gates Sr. says rich Americans should pay more tax. He is supporting a special tax on the wealthy in the State where he lives. Never happen, but one day they might wish it had, if everything falls apart. Lehman almost did it. Remember the martial law threat to Congress from Paulson? He wasn’t kidding.
And how about the US government making money on the Citi bailout.