Dubai Ports breaks record with $3.5 bln Islamic bond

DUBAI (Reuters) - Dubai Ports has raised $3.5 billion from the biggest Islamic bond in history, with huge demand giving the rapidly-expanding company 25 percent more money than it sought at an unexpectedly low cost.

The issuer of the two-year convertible bond is the Ports, Customs and Free Zone Corporation (PCFC), holding company of Dubai Ports World, which is bracing for a multi-billion dollar bidding war over British ports firm P&O (PO.L: Quote, Profile, Research).

The bond, or sukuk, had been expected to attract intense interest given that Islamic bond issues are relatively rare. But the lead managers said demand exceeded even their estimates and the bond priced 50 basis points below the forecast range.

The issue was initially set at $2.8 billion, the largest in history for the first ever convertible Islamic bond, offering holders 30 percent of the shares of government-owned PCFC's companies should they decide to go public.

The bond's eventual value of $3.5 billion made it one of the 10 largest convertible bonds in history, said Faisal Mikou, director of investment banking at Barclays Capital (BARC.L: Quote, Profile, Research).

Dubai Islamic Bank <DISB.DU>, co-lead manager with Barclays Capital, said last month demand was so strong the bond was likely to be at least 50-75 percent oversubscribed.

"The issue was significantly oversubscribed, even more than was indicated in the Dubai Islamic Bank statement in December," Mikou told Reuters in Dubai on Thursday.

The bond, which matures on January 23, 2008, priced at a Qualified Public Offering yield of 7.125 percent -- that is the return investors would get in the event of a share offering by Dubai ports firms.

If there was no IPO the bond would pay 10.125 percent.

Mikou said the bond had been expected to price between 250-350 basis points over the equivalent U.S. dollar swap. "The pricing was 200 basis points over the relevant swap," he said. "This is a very good achievement for the issuer."

"What appealed to people was its innovative structure," said Douglas Decker, head of convertible bond origination at Barclays Capital.

"There was a very strong, broad order book of global investors that have come in on the deal," he told Reuters in London.

The bond's success reflects the growing stature of Islamic finance, an industry that is expanding at more 15 percent a year and caters to devout Muslims who want to avoid borrowing or lending on interest.

Instead of interest, sukuk investors get regular payments based on profits from approved investments.

Before this issue, the total value of the sukuk market was estimated at $10 billion, a relatively small pool of investment options for Islamic banks with an asset base worth over $250 billion.

There is virtually no secondary market for sukuks and most are held to maturity.

Mikou said Dubai Ports had applied to have the sukuk listed on the Dubai International Financial Exchange.

Dubai Ports made a $5.7 billion bid for P&O in November, but the British firm announced this week that it had received an approach from Singapore's PSA with a possible offer of $6.2 billion.