The price of the Dubai Department of Finance's 2014 Islamic bond, issued last November, increased significantly and yields dropped by more than 40 basis points (bps) during the issuance of Dewa's $1 billion (Dh3.67bn) bonds, as markets anticipate positive trends in Dubai's economy.
Dewa's bond, maturing in 2015, was more than 11 times oversubscribed on Thursday by investors in the United States, Europe, Asia and the Middle East in just two hours and 15 minutes.
The final book size closed at $11.5bn, allowing Dewa to price a $1bn five-year bond at 8.5 per cent semi-annual fixed coupon, a quarter percentage lower that the initial guidance of 8.75 per cent.
"The Dewa transaction did a service from a pricing perspective to the outstanding bond of the government," Alan Roch, RBS Emerging Markets Fixed Income Syndicate Director, told Emirates Business.
"The bond investor community gained confidence early during the marketing phase that Dewa was going to have a very warm welcome in the bond market, and that this would have positive ramifications for Dubai. Therefore, the yields on the outstanding Dubai bond reduced," he said.
The Dubai 6.396 per cent sukuk, maturing on November 3, 2014, was earlier offered at a price yield of 7.60 per cent and is now offered at 7.15 per cent.
Bond yields have continued to rise until February as growing uncertainty over the fate of Dubai World sent investors scrambling to hedge their exposure.
Roch said the response to Dewa's fixed income instrument – which represents the first US dollar benchmark offering to emerge from a Dubai corporate since 2008, and the first bond from Dubai to come out after the Dubai World announcement – shows investors' vote of confidence to Dubai as a whole. "Dewa, being a 100 per cent owned state entity, means the significant oversubscription is a vote of confidence for Dubai," he said. "Dewa got the timing of its transaction right, it is the right name from the right sector and will play an important part of the overall Dubai story."
Response exceeds expectations
Dewa's $1 billion (Dh3.67bn) may set the stage for more Dubai issuers to tap the debt markets.
"I cannot think of any deal that has benefited from a larger oversubscription," said Alan Roch, RBS Emerging Markets Fixed Income Syndicate Director.
The transaction has established a key liquid benchmark for Dubai, said Nasser Akil Abbas, Dewa's Treasury Director. "This will facilitate other Dubai corporates in their ambitions when accessing the debt capital markets," he said.
RBS (Royal Bank of Scotland), Citi, National Bank of Abu Dhabi and Standard Chartered Bank were the joint bookrunners.
The United States is the largest subscriber in terms of regional breakdown while asset managers dominate almost half of the programme. Roch said 35 per cent of the bonds went to the US, 30 per cent to European investors (UK and the continental Europe), while Asia and the Middle East comprise 20 per cent and 15 per cent of the investors' base, respectively.
In terms of investor type, 49 per cent went to asset managers, 16 per cent to banks, 14 per cent to funds, eight per cent to private banks, four per cent to insurance companies and nine per cent to various other types of investors.
The final book size closed at $11.5bn, allowing Dewa to price a $1bn bond at the tight end of the revised price guidance. The five-year bond was priced at par offering an 8.5 per cent semi-annual fixed coupon.
"The response exceeded our expectations and exceeded issuers' expectations," Roch said. "We've got asset managers asking more than $200 million bonds. They did not get that but it showed they were very comfortable adding significant new positions onto their books."
He said a government guarantee was not necessary in this case because of Dewa's strong credit.
"When you have a government guarantee you shift the focus of the transaction a little bit away from the credit metrics to the strength of the government support…the market prefers to have these without a guarantee," Roch said.
Dewa MD and CEO Saeed Mohammad Al Tayer said this confirms "that entities which offer a clear business strategy and strong standalone credit metrics will have access to the international capital markets".