Government of Dubai Returns to International Sukuk Market with a US$1bn COVID-19 Mitigation Issuance

The twin effects of the COVID-19 pandemic and the sharp decline in crude oil prices has impacted the fiscal and growth challenges in the Gulf Cooperation Council (GCC) countries. The result has been that higher-rated GCC economies such as Dubai and Abu Dhabi have resorted to tapping the international debt markets with sovereign bond and Sukuk offerings in August 2020.

The Dubai Department of Finance raised US$2 billion through two tranches – one a US$1 billion Sukuk issuance and the other a US$1 billion bond offering. This followed an earlier foray into the market in August by the Abu Dhabi Government which raised US$5 billion through a 3-tranche conventional bond offering – a US$1.5 billion 11-year bond with a coupon rate of 1.7%, a US$2 billion 3-year bond with a coupon rate of 0.75%; and a US$1.5 billion 50-year tranche with a coupon rate of 2.7%.

These issues came against a background of continuing macro-economic concerns, prompted principally by the COVID-19 pandemic. Fitch Ratings for instance expects most GCC sovereigns to post fiscal deficits of 15%-25% of GDP in 2020. Wider fiscal deficits will lead to higher debt and drawdowns of fiscal reserves. “In 2020, we expect the GCC funding mix to shift in favour of drawdowns from fiscal reserves. We expect the GCC to issue around US$48 billion in foreign debt this year (of which US$30 billion has already been issued). This will be accompanied by around US$140 billion in drawdowns from fiscal reserves and wealth funds, compared with only about US$10 billion last year,” said Fitch in a recent report on the impact of COVID-19 and Oil on GCC Sovereigns.

The Government of Dubai US$1 billion Sukuk was issued by the Dubai DOF Sukuk Limited, a special purpose vehicle incorporated in the Cayman Islands, on behalf of the Dubai Ministry of Finance. It has a 10-year tenor and priced at a profit rate of 2.763% maturing on 9 September 2030. This compared with the US$1 billion tranche with a 30-year tenor and priced at an interest rate of 3.9% maturing on 9 September 2050. “We are satisfied with the success of Dubai in this issuance. The Department of Finance (DoF) was able to obtain the lowest interest rate for 30-year bonds and the lowest profit rate for 10-year Sukuk in Dubai government’s history,” confirmed Abdulrahman Saleh Al Saleh, Director General of DoF.

“This issuance was in line with the determinants of the financial policy pursued by the emirate, which was based on financial sustainability and continued spending on vital infrastructure projects, while responding to the requirements of the current stage set in the budget priorities circular, issued at the beginning of the second quarter of this year. This is a strong indicator of the efficiency of government financial solvency and the continued high investor confidence in the financial landscape of the Dubai government at the global level,” Al Saleh added.

Earlier the Government of Dubai had mandated Dubai Islamic Bank, Emirates NBD, First Abu Dhabi Bank, HSBC, and Standard Chartered Bank to manage the Sukuk issuance process through virtual meetings with managers, distributors and potential investors. According to Rashed Ali bin Obood, Head of Investors Affairs at DoF, “the value of the order book exceeded US$10 billion, five times more than the target value of the issuance. The strength of the order book as well as the diversity of the investor base reflect the strong confidence of international community in the resilience of the emirate’s economy and the reaffirmation of the superiority of Dubai’s credit globally.”

“Global investors made up 84 per cent of the total investors in the long-term bond segment (30 years). The continuous positive interaction of the Dubai government with the global investment markets in the past years has always played an important role in the success of previous bonds and Sukuk issuances, which is also reflected in this issuance by lowering the rates,” added Bin Obood.

The Government of Dubai last issued a Sukuk in 2014, albeit one of its entities, DP World, the Dubai-based global port operator and logistics group, which is a regular issuer of Sukuk closed its latest offering in July 2020 – a U.S.$1.5 billion Subordinated Perpetual Sukuk Murabaha issuance.

The impact of COVID-19 has already seen the World Expo Dubai 2020 postponed by a year. According to the Dubai Statistics Center, Dubai’s GDP shrank by 3.5% year-on-year in Q1 2020 amid the coronavirus pandemic. Similarly, trade contracted by 7.5% while transport and storage activities declined by 5.5% in the same period. But it has been the travel and tourism sector that has taken the biggest, at 14.8% in the same period.

Dubai’s Emirates Airlines for instance received an emergency injection of US$2 billion in an industry which has created havoc worldwide. By end August, Emirates returned over AED5 billion (US$1.4 billion) in coronavirus related travel refunds. According to the debt issuance prospectus Dubai’s outstanding direct debt stood at AED123.5 billion (US$33.6 billion) as of June 30 although the IMF in its Article IV Consultation earlier this year put it much higher.

Depending on the UAE and Dubai’s COVID-19 economic recovery strategy and on the global containment of the pandemic especially through a workable vaccine, Dubai – in line with many other countries – may have to return to the debt markets sooner than later, with the strong possibility of more Sukuk and bond issuances.

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