DUBAI - Dubai's government will use proceeds from a recent bond issue to pay off a $1 billion Islamic bond from the emirate's department of civil aviation, maturing on Nov. 4, a source familiar with the matter said on Wednesday.The global credit crunch has hurt Dubai, one of seven members of the United Arab Emirates, leaving markets guessing whether it would be able to restructure a debt pile built up in years' of real-estate fuelled boom.
"The Dubai government will be using funds from the bond issue last week to pay off the department of civil aviation bond," the source said.
"It's not been completed, it's still under process," the source said.
Last week, Dubai placed almost $2 billion in new five-year Islamic bond issues, a confidence booster for the debt-laden Gulf emirate, which faces restructuring of its $80 billion debt owed together with its government related entities.
Investors -- often starved of information in a region known for its lack of transparency -- were keen to see how Dubai would be able to tap markets still suffering from last year's financial turmoil.
The market was expecting the Dubai government to use the funds from its latest issue to repay its maturing obligation, but a banker said the confirmation that it was happening was a positive sign.
"It is a very positive step. It basically restores faith in Dubai's ability and Dubai's willingness to honour its commitments and honour its liabilities," a Dubai-based banker said.
"I think we will see a positive impact on the local credit names," he said.
Credit default swap rates for five-year Dubai debt fell sharply to stand at 307 basis points, compared to February highs of around 943 points, indicating investor confidence had returned.
The government of Dubai launched a $6.5 billion bond plan last month, consisting of $4 billion euro medium term notes and a $2.5 billion Islamic bond, or sukuk, programme. Dubai raised $10 billion in emergency cash from the UAE's central bank early this year through a bond issue as part of a plan to raise a total of $20 billion to finance obligations still pending.
The emirate has about $4 billion to restructure over the next two months, including the world's largest Islamic bond to date, a $3.5 billion issue, from the developer of its palm-shaped islands Nakheel.
Prices of Nakheel's sukuk maturing on Dec 14 rose on Wednesday to 109.35 from a low of 103 almost three weeks ago.