UAE Dirham Bonds, the next fashion?

Bonds are not new to the financial scene in Dubai, only now they’re starting to become popular. More than AED 28 bil worth of bonds were issued in the last seven months, and this time in UAE Dirhams instead of US Dollars.

UAE governments and corporates are betting on steady growth, selling debt at large to target the massive liquidity out there by providing safer products to the portfolios of institutional investors who were hit hard by the recent bearish trends in the regional markets.

There’s a speculation about the real reason why the recent bond issues were denominated in UAE Dirhams instead of Dollars. State-owned utility company DEWA for instance was supposed to issue bonds in US Dollars last November but it got postponed till last month where they were issued in Dirhams. It could be related to a near revaluation of the UAE Dirham or an abandonment of the US Dollar peg.

Another aspect to UAE bonds is that they’re mostly Islamic. “Sukuk”, or Islamic bonds, as opposed to regular bonds, feature something called “Ijara”, or a leasing agreement, by which the bond holder is actually receiving returns derived from underlying assets, and not interest-based coupons since interest is banned in Islam. Nevertheless, UAE bonds and Sukuk are being priced at various spreads above the interest rate EIBOR (Emirates Interbank Offered Rate), sometimes as generous as %2.15 in the case of two-year Sukuk by property developer Nakheel.

More than half of UAE bonds are not yet rated. There are no rating agencies in the region, and not enough regulations for bankruptcy and default.

The bonds are not available to the retail investor but the latter can get exposure to such bonds through mutual funds.

Some of the major issuers include: Dubai Government AED 6.5 bil, Ras Al Khaima Government AED 1 bil, Jebel Ali Free Zone (JAFZA) AED 7.5 bil, Dubai Water and Electricity Authority (DEWA) AED 3.2 bil, Emirates NBD Bank AED 2.1 bil, HSBC AED 2.25 bil, Emirates Airlines AED 1.8 bil (traded on DFM as EK-2013), Nakheel AED 3.6 bil, and Aldar Properties AED 3.75 bil.