Why wait?

Dubai: Dubai is returning to the debt markets at just the right moment. Less than a year since flagship conglomerate Dubai World was forced to restructure almost $25 billion of borrowings, demand for a planned $1 billion sovereign debt issue is hot. It might seem too soon to tap bond markets when creditors should still be smarting from last year’s crisis. But the emirate has good reason to expect a favourable reception.

For a start, the worst appears to be over. The Dubai World restructuring is set to be signed off within weeks. Lenders will get full repayment of principal over an extended period up to eight years, but take an effective haircut via lower coupons. Dubai World’s difficulties did not constitute a sovereign default but markets treated it like one. The oil-poor emirate depends on debt markets, and remains without a credit rating. So the rapid and relatively generous restructuring deal the government reached with over 70 international banks was crucial to Dubai’s rehabilitation. The restructuring process also forced the emirate to distinguish the credit status of Dubai’s government-owned “private” sector, estimated to have had debt in excess of $100 billion, from the government itself, which owed just $29 billion at the end of July 2010.

While questions remain about the health of the overall economy devastated by the bursting of Dubai’s real-estate bubble, investors now have a clearer idea of the risks.

The International Monetary Fund forecasts that Dubai faces its second consecutive year of negative economic growth in 2010. But with the sovereign crisis still playing out in the euro zone, the emirate has an investment story for emerging-market investors. Its future as a hub for regional trade and tourism remains intact. The ambition of being a top financial centre - which helped lead the emirate astray - is no longer a core part of Dubai’s 2015 strategic plan, according to the bond prospectus, but Dubai remains ahead on that front too compared to regional rivals.

The sale comprises five- and 10-year bonds - to fly. Initial yield guidance puts the five-year bond yield at 6.75 percent, a slight premium to the 6.36 percent effective coupon on the five-year fixed-rate Islamic bond the government issued last November. It’s as if investors think Dubai’s debt crisis never happened.