Open to foreign investors

Foreigners will be able to buy a stake in Dubai PLC when the government launches its first ever bond issue. But will they be interested, and will the AED 1.5 billion bond give a boost to Dubai Financial Market?

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By  David Ingham Published  February 5, 2002

$400 million|~||~||~|International investors will soon be able to buy a stake in Dubai’s potential future prosperity. The Government of Dubai has outlined plans to launch its first ever bond, targeted at AED1.5 billion, and has confirmed that the issue will be open to foreign as well as local investors.

The aim of the exercise is twofold. Firstly, there’s the small matter of the meeting of the IMF and World Bank governors in Dubai in 2003. The criteria for hosting this prestigious event are strict and money needs to be raised to fund the construction of a world class convention centre, amongst other things. The bond will allow the government to raise capital quickly and at rates favourable with bank loans.

Secondly, the government aims to provide a boost to Dubai Financial Market (DFM), where the bond will be listed. DFM currently has just a handful of listed companies and modest trading volumes, and it’s hoped that the bond will encourage trading activity and overall interest in the market.

“It’s really a win-win situation,” says Ibrahim Belsaleh, managing director for Dubai 2003. “We, as the government, get the funds we need at a favourable rate, and also we’re creating a secondary market and giving investors a stake in Dubai’s future.”

Exact details on when the bond might be issued and what the terms will be were not yet available when Arabian Business spoke to Belsaleh. The government was then in the process of appointing advisors, underwriters and managers for the issue. They will help decide on the timing and the terms of the issue, although weeks rather than months were mentioned for the appointment of advisors and managers.

The bond will definitely be listed locally, but whether or not it will be floated on an international market, like the FTSE, has not yet been decided. What is for sure is that the issue will be open to foreign investors. “Somebody in the UK or someone here from outside can invest. That is part of the plan,” confirms Belsaleh.
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Given how many options investors have open to them, why will the bond prove attractive for investors, particularly internationally? “As we’re becoming more global, investors look for opportunities around the world and look to diversify,” says Belsaleh. “Then you look for a higher yield for your investment and, of course, the security of your investment.”

In short, he says, the bond will offer international investors a good return and will be backed by a government with a solid reputation. From the local investor’s perspective, the yield on the bond will be higher that that offered on bank deposits and provides an alternative to the small number of stocks, around a dozen, offered on the DFM.

However, the government’s motivation is not, Belsaleh says, to stop capital flight. “We are targeting any investors, so it’s not a question of stopping the money moving in and out, it’s creating an investment,” he says. “We want a quality, competitive product and investors will buy it because of the return that they will get.”

The one precedent for the Government of Dubai’s bond issue is that of Emirates Airlines last year and comparisons will be inevitable. Emirates was the first company to issue a bond on the Dubai Financial Market and the entire exercise was a runaway success.

After initially targeting AED750 million, the issue was doubled to AED1.5 billion after being two and a half times oversubscribed. Emirates was able to raise cash at low cost without giving away equity. The bond was issued in the form of a Floating Rate Note (FRN) and has a maturity of five years.

It pays interest semi-annually at a rate of 70 basis points over the six-month EBOR (United Emirates InterBank Offered Rate), which will be reset every six months. Minimum subscriptions were set at AED 5 million and notes can be traded in the secondary market.

Equally delighted with the issue was the Dubai Financial Market (DFM), which obviously wants to boost trading activity but has only a small number of companies listed. In a previous interview with Arabian Business, the director general of DFM, Essa Abdulfattah Kazim, said that bonds might well prove a more popular method than IPOs for companies that want to raise capital.

“Bond financing is something that a lot of companies might be looking at in the near future,” said Kazim. “Companies are still reluctant to go public.”
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The AED1.5 billion that the government aims to raise from the bond will be used to help finance the construction of a world class convention centre suitable for hosting the IMF and World Bank governors’ meeting. The event takes place annually in Washington for two consecutive years and then moves to another city in the third year, before reverting back to Washington.

The event is large and prestigious and is a major coup for the city that is selected to hold it. However, if you want to hold the meeting criteria are strict and Dubai applied unsuccessfully in 1996 to host the meeting in 2000.

“They look at the whole place,” says Belsaleh. He reels off a long list of criteria that Dubai had to meet: the quality of the airport and the transport infrastructure in general; accessibility from the rest of the world and the standard of hotels.

The most important thing of all, according to Belsaleh, is the convention centre itself, which must be able to hold several thousand people in one room for general sessions. Alongside that is the need for smaller meeting rooms, instant translation services and state of the art communications links.

On top of all that, there has to be total security for an event that hosts several heads of state, plus finance ministers and heads of central banks from most countries in the world. “We met their requirements and were lucky enough to win against some other very prestigious cities,” says Belsaleh.

Construction of the convention centre is budgeted to cost AED450 million and contracts have already been signed with construction companies. It was not specified how the rest of the proceeds of the bond would be used by the Government of Dubai.

The idea of all this expense and effort is not just to make Dubai feel good for a few days. Having the top players in the world’s financial community in Dubai allows the region’s investment potential to be showcased to investors.

“As you know, this part of the world gets almost nothing in direct investment, just around 1% of direct investment worldwide,” says Belsaleh. “It’s a great opportunity to showcase our plans and attract more investment from international firms. The vision for Dubai is to be one of the most important financial centres in the world and where better to start than with this important event.”

As already mentioned, this is the first time the Government of Dubai has opted for a bond issue, rather than a bank loan, as a way of raising finance. If everything works out according to plan, the government of Dubai will raise the money it seeks on favourable terms, DFM will receive a boost and foreign investors will have been able to buy a little stake in Dubai’s success.||**||

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