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Revaluation talk hits $2.5b of UAE dollar bonds

DUBAI/MANAMA — Expectations that the UAE will revalue its dollar-pegged dirham currency are dampening demand for two U.S. dollar Islamic bonds, which have already been affected by the global credit crisis, bankers said on Wednesday.

Dubai Electricity & Water Authority (Dewa) and the Ras Al Khaimah Investment Authority (RAKIA) came to market on November 5 and 6, before the UAE central bank governor said last week that he was considering swapping the dollar peg for a currency basket.

“Local banks do not want to touch the dollar and issuers are waiting for some clarification from the central bank,” said a banker who is looking to buy Dewa’s bonds. He declined to be identified.

UAE investors in dollar bonds fear a dirham appreciation because this would reduce returns in local currency, and when the bonds mature they would be paid less than they had agreed to lend in dirham terms.

Both sales had already been affected by the credit crisis.

Dewa set initial yield guidance of about 120 basis points over five-year London interbank offered rate (LIBOR) on its Islamic bonds to raise more than $2 billion.

It then cut the maturity of the bond from five to three years and revised guidance to 100 basis points over three-year LIBOR to reduce borrowing costs, arrangers said yesterday.

RAKIA gave initial guidance of 150 basis points over LIBOR for an estimated $500 million sale. Dubai and Ras Al Khaimah are members of the UAE federation.

The cost of borrowing in the Gulf Arab Islamic bond market has surged since U.S. mortgage defaults triggered a global credit crunch in July.

Dubai International Financial Centre, owned by the government of Dubai like Dewa, priced a $1.25 billion five-year Islamic bond, or sukuk, at 42 basis points over LIBOR in June.

“The prices are absolutely ridiculous,” said another banker who also asked not to be named. “It’s a combination of everything, the dollar falling and more credit write offs.”

Following a string of write-downs by U.S. banks such as Citigroup, Japan’s largest lender Mitsubishi UFJ Financial Group reported a 49 per cent drop in first-half profit yesterday due to losses on the credit market.

Despite the credit crunch, another Dubai government entity, Jebel Ali Free Zone, sold a dirham-denominated sukuk on Tuesday raising Dh7.5 billion ($2.04 billion).

The sale was oversubscribed, partly because investors were expecting the dirham to appreciate against the dollar for the first time since 1997, bankers said.

”There is so much talk about revaluation and de-pegging with the dollar that there was a large amount of interest from local, regional and international investors,” said a third banker who was involved in both the Dewa and Jebel Ali transactions.