Financial press reports that Dubai Electricity and Water Authority ("DEWA") is planning a bond and/or sukuk issue for 1Q 2010.
This source says that Citibank, Barclays and Dubai Islamic Bank have been tipped to do the deal. Other market discussion is that the UK bank is Standard Chartered. Perhaps both are involved? Stan Chart had a major role in the syndicated loan earlier this year.
A bold move in the midst of a request for a standstill, particularly when DEWA is not a sovereign borrower as outlined below.
The sukuk/bond appears to be new money financing. That is, it is not designed to refinance a maturing obligation. But rather to secure additional funding.
On 8 April 2009 DEWA announced the closing of a three-year US$2.2 billion equivalent syndicated "Islamic" refinancing loan at 300 basis points over Libor. This facility refinanced a one year "Islamic" loan which had a margin a fraction of the replacement loan. Later in May DEWA announced a thirteen-year ECA backed US$ 1 billion loan. Both without a sovereign guarantee.
Also in June 2008 DEWA issued a five-year AED 3.2 billion (US$880 million) with Citi, Barclay and DIB as lead managers. Again no sovereign guarantee.
From the Sukuk prospectus page 17:
"DEWA’s financial obligations are not guaranteed by the Government
Although DEWA is a wholly owned Government entity and also functions as a Government department providing an essential public utility, it is still an independent commercial enterprise and its financial obligations (including its financial obligations under the Transaction Documents) are not guaranteed by the Government. Therefore, DEWA’s ability to meet its financial obligations under the Transaction Documents, and consequently, the Issuer’s ability to pay Periodic Distribution Amounts and Dissolution Distribution Amounts to Certificateholders is solely dependent on DEWA’s ability to fund such amounts from its business and operations."
Although DEWA is a wholly owned Government entity and also functions as a Government department providing an essential public utility, it is still an independent commercial enterprise and its financial obligations (including its financial obligations under the Transaction Documents) are not guaranteed by the Government. Therefore, DEWA’s ability to meet its financial obligations under the Transaction Documents, and consequently, the Issuer’s ability to pay Periodic Distribution Amounts and Dissolution Distribution Amounts to Certificateholders is solely dependent on DEWA’s ability to fund such amounts from its business and operations."
In case you're still catching a glimpse of an implicit guarantee, here's an extract from Note 1 to DEWA's 2008 financials:
"Dubai Electricity and Water Authority (“DEWA” or “the Authority”) was incorporated on 1 January 1992 in the Emirate of Dubai by a decree (“the Original Decree”) issued by H.H., the Ruler of Dubai, effective 1 January 1992, as an independent public authority having status of a body corporate, and financially and administratively independent from the Government."
Just recently Fitch downgraded DEWA to BBB- based on an assessment that Government support cannot be counted on.
If you still see an implicit guarantee, AA suggests a visit to your opthalmologist is in order.
The question is what rate DEWA will have to pay on the new Sukuk.
As of today, Dubai Sovereign US$ Sukuks (DEWA is not Sovereign) are trading very roughly at a spread of 550 to 570 basis points with AED denominated issues somewhere around 80 to 100 basis points less. Jebel Ali Free Zone (which is B+ note DEWA is BBB-) is trading at more than twice the Dubai Sovereign spread. That suggests a range. One would expect if priced today that logically DEWA a non Sovereign Dubai obligation would carry a higher rate than the Sovereign. That implies something over 600 basis points.
Some caveats:
Bankers and investors don't like uncertainty so I'd anticipate higher rather than lower prices. DEWA has an ambitious capital spending program and constraining it will be more difficult than not building another 1 km tall sky scraper. So it needs the money. And Dubai does not have a lot of financing alternatives in the market. The market knows this.
The question is what rate DEWA will have to pay on the new Sukuk.
As of today, Dubai Sovereign US$ Sukuks (DEWA is not Sovereign) are trading very roughly at a spread of 550 to 570 basis points with AED denominated issues somewhere around 80 to 100 basis points less. Jebel Ali Free Zone (which is B+ note DEWA is BBB-) is trading at more than twice the Dubai Sovereign spread. That suggests a range. One would expect if priced today that logically DEWA a non Sovereign Dubai obligation would carry a higher rate than the Sovereign. That implies something over 600 basis points.
Some caveats:
- As mentioned earlier, most bond markets (except US Governments) are thin. Prices accordingly have less "precision" than in more liquid markets. The GCC bond market is relatively anorexic compared to other thin markets. The true test of a quote is when you try to hit it as screens do not trade institutions do.
- Pricing in 1Q 2010 will reflect (a) what has happened and how it has happened on the Dubai World restructuring of Nakheel and (b) macro economic factors/investor preference.
- It's also important to remember that financial markets are not always logical.
Bankers and investors don't like uncertainty so I'd anticipate higher rather than lower prices. DEWA has an ambitious capital spending program and constraining it will be more difficult than not building another 1 km tall sky scraper. So it needs the money. And Dubai does not have a lot of financing alternatives in the market. The market knows this.
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