Dubai utility DEWA eyes $1 bln sukuk to repay debt, fund projects

The Dubai Electricity & Water Authority (DEWA) is planning to issue a $1 billion sukuk, the

proceeds from which will be used to repay a sukuk issued in 2008 that matures in June. The

last time DEWA sold any debt—conventional or Islamic—was October 2010 when it still had to

pay a premium for being a part of the Dubai government (which owns 100% of DEWA). Times

have changed since this last issuance. Its 10 year bond (with 7.375% coupon) and the 6 year

bond (with 6.375% coupon) currently yield 3.99% and 2.78%, respectively, according to

indicative prices provided by Zawya as of February 21, 2013. Just five months at the Nakheel

sukuk repayment came due, the trigger for the Dubai debt crisis, DEWA issued a 5-year bond

for which it had to pay an 8.5% coupon, which is currently yielding just 2.32%.

So debt is cheap and DEWA is jumping in, choosing sukuk because it offers greater value, CEO

Saeed Mohammed al-Tayer told reporters: “We’re going for the cheapest option and sukuk is

the cheapest now”. At this point, one would be forgiven for developing concern that the Dubai

debt binge is back on, with no lessons learned from the crisis which engulfed Dubai in

December 2009 after the real estate bubble burst.

Yet, there may be a different story here, which led to speculation rising in January that DEWA’s

sukuk could price inside of the Dubai sovereign bond and sukuk. During the pre-crisis years,

DEWA grew rapidly, with revenue growing between 2006 and 2009 at an annualized 24.5% rate

and profits growing even more rapidly at an annualized rate of over 110%. In part this was a

result of significantly widening gross margins (from 10% in 2006 to 50% in 2009, which have

since declined to 42%). But a more significant impact was rising debt from near zero before

peaking at 70% of the company’s equity in 2010. This leveraging included the issuance of the

company’s June 2008 ijara sukuk, for AED3.2 billion, with rental payments of 125bps over 6

months EIBOR.

Since the debt crisis in 2009, DEWA has returned to growth, recording a higher profit in 2012

than in 2009 for the first time, despite a significantly slower growth in revenues compared with

the pre-crisis period, not surprising since new buildings comes with new demands for electricity

and water. However, DEWA has not returned to growth through increasing leverage; quite the

opposite. Since peaking at 70% of equity and 32% of assets, the debt level has fallen to 41%

and 22%, respectively, which is below the average for emerging market utilities.

Now that Dubai has recovered from a vicious real estate collapse, commentators are on edge

looking for the next bubble (or even the return to the bubble days in the real estate sector). And

if the economy was leveraging up as borrowing costs fall dramatically, one area where the

growth in debt would show up is on the balance sheets of the quasi-sovereign entities

(particularly those that are capital intensive) who expanded rapidly in the pre-crisis days on the

back of growing debt. As far as DEWA goes, this trend does not seem to be materializing and

instead, the company is focusing on refinancing a maturing sukuk with a new sukuk to lock in

the enthusiasm for Dubai-related sukuk. And in one final note for the sukuk market as a whole,

DEWA’s maturing sukuk was issued in June 2008, immediately before the financial crisis and

despite the turmoil of the financial crisis and the Dubai debt crisis, DEWA is returning to the

market to refinance that sukuk, not just as a show of sovereign support for the market (DEWA is

100% owned by the Investment Corporation of Dubai), but based on the sukuk market offering a

better value than the bond markets.

Note: Nothing here is a recommendation to buy or sell any security, nor is it personalized investment advice.

Sign up for Thomason Reuters Islamic Finance Gateway (IFG) at no additional cost and join the

Morning Wrap up as we discuss this matter and others, Tuesdays and Thursdays at 9.30 Mecca

time (GMT +3).

Debt / Equity Debt / Assets

Average Emerging Market Electric/Water Utility *

78% 30%

DEWA 2010 70% 32%

DEWA 2012 41% 22%

* Data gathered from 6 electric companies and 1 water company in Latin America, Eastern Europe, Southeast Asia, India and Russia as of December 31, 2011.