Investors lined up over $17 billion (Dh62.4 billion) for Abu Dhabi’s $5 billion bond issue, which is being viewed as a vote of confidence for the emirate.
Abu Dhabi, which has a AA sovereign rating and one of the world’s lowest debt to GDP ratio, marked a return to the bond market after a gap of seven years. The Abu Dhabi government announced in December that it expects to post a budget deficit of Dh36.9 billion in 2016. Industry watchers say it received robust response for the bond issue, which was partly intended to plug the deficit.
“Investors are comfortable in investing in Abu Dhabi debt, and there is that confidence in the ability and the capacity of the government to pay them that debt,” Nadi Bargouti, Managing Director - Head of Asset Management at Emirates Investment Bank told Gulf News.
Abu Dhabi last tapped investors with a bond in April 2009, selling $1.5 billion in 10-year securities.
The 5-year bond, which received over 600 orders, was priced at a yield of 2.218 per cent, the 10-year bond with a yield of 3.154 per cent with a spread of 85 bps (basis points) and 125 bps respectively, over the relevant US Treasury, the state news agency WAM said. The bond issue was subscribed mostly by foreign investors, with atleast more than 40 per cent by investors in the Middle East, and atleast half of the issue was subscribed by the banks.
“The bond issue is positive generally and a move in right direction, and this is what we have been advocating for a long time that the government need to diversify their sources of income. They haven’t been utilising their low debt to GDP advantage, so this is a step in the right direction,” Bargouti said, adding “we encourage the government to issue more bonds as they have the capacity to do more and take advantage of the lower interest rates at this time.”
The UAE has implemented many steps to improve its public finances by removing government subsidies. A GCC-wide Value Added Tax in due to be implemented by 2018.
“The emirate has adopted a prudent, model for comprehensive development over the course of more than five decades, by adopting balanced fiscal policy and building a solid budget for the public sector and maintaining moderate level of public debt, which has led to strong credit profile and large fiscal buffers,” Riyad Al Mubarak, Chairman of the Department of Finance Abu Dhabi, said in a statement.
Credit Default Swaps (CDS), which is cost of insuring the underlying debt for Abu Dhabi is 82 bps, compared to regional sovereigns such as Saudi Arabia at 157 bps. Countries with a AAA sovereign ratings such as the United Kingdom and Germany have a CDS of 35 bps and 18 bps respectively.
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