Dubai, which narrowly averted a bond default in 2009, could use money raised by its sovereign wealth fund to help repay $3.8 billion in bonds owed by state-linked firms which mature next year, a source familiar with the matter said on Tuesday.

The Gulf Arab emirate has clawed its way back from the depths of its debt crisis, helped by an economic revival in trade and tourism and its safe-haven status amid the Arab Spring revolts, but still faces the challenge of big debt repayments.

The source said discussions in government circles focus on $3.8 billion in bonds due next year from a trio of state-linked firms which are seen as having the highest refinancing risk -- Dubai Holding Commercial Operations Group (DHCOG), part of the ruler's private holding company, DIFC Investments (DIFCI) and Jebel Ali Free Zone (Jafza).

The Investment Corporation of Dubai (ICD), the emirate's sovereign wealth arm, which is run by a key figure tasked with resolving Dubai's debt mess, may be involved.

"All options are still on the table for the bonds. Could be refinanced, could be paid back by ICD partially," the source said, speaking on condition of anonymity. "ICD would use funds that it raised (recently)."

"It has raised $1.5 billion in bilateral loans and is aiming for $2 billion, it's mostly from local banks."

ICD holds about $70 billion in assets and its financial position is bolstered by dividend payouts from its portfolio of companies. Its investments include successful airline Emirates , bank Emirates NBD and Dubai Islamic Bank .

Bond restructuring?

A government official suggested that all paths were being considered including a restructuring.

"As you know, the Dubai government has previously paid some (debt) and refinanced some and it might be the same again," he said, on condition of anonymity.

The Financial Times said on Tuesday that Dubai had raised the prospect of restructuring some bonds and is pursuing other options to help state-related entities meet their obligations.

Those include raising $2 billion in funds from liquid local banks, the newspaper said.

"We are working hard to meet all our liabilities but times are different. We are more confident we can negotiate a commercial deal with bondholders," a senior government official is quoted as saying in the article.

Dubai's main share index was down 1.2 percent with some traders citing worries over the restructuring possibility.

Dubai has negotiated terms to restructure some $41 billion of debt related to its flagship conglomerate Dubai World and its property arm Nakheel, and other state-linked firms have been refinancing loans over the past two years.

But it has been careful to pay bondholders in full upon maturity and restructuring such issues would be a departure, possibly signalling the depleted resources left in its financial support fund for Dubai Inc., as the matrix of state-linked firms are known.

"Dubai has put a substantial amount of effort into restoring its credibility," said Chavan Bhogaita, head of markets strategy unit at National Bank of Abu Dhabi.

"'Restructuring' high profile bonds from the likes of Jafz, DIFCI and DHCOG would simply undermine all these efforts and possibly take us back to late 2009, early 2010-type sentiment. In our view, it doesn't make sense to do this."

A more likely scenario is that Dubai is floating a trial balloon and laying the groundwork for a debt swap on some maturities as an option.

In December 2009, Abu Dhabi stepped in with a last-minute lifeline to help Dubai avert an embarrassing default on a Nakheel Islamic bond. It subsequently paid off Nakheel's 2010 and 2011 bonds in full upon maturity.

Dubai stunned global markets in November 2009 when it sought a standstill on $26 billion in debts related to Dubai World. It struck a deal with banks last year, promising full repayment on the principal in five to eight years.

All three major bond maturities due next year trade at a deep discount to par, suggesting investors place a massive premium on the bonds to reflect the potential risks associated with timely and full repayment.

Jafza's 7.5 billion dirham ($2 billion) 2.991 percent sukuk, or Islamic bond, maturing next November was yielding 11.996 percent on Tuesday, up from 10.3 percent about a month ago.

DIFCI's $1.25 billion 0.713 percent sukuk rallied slightly on Tuesday, but the yield has risen over 3 percent on the bonds since the beginning of November.

"We believe it is DIFCI that is most likely to rely on direct government support in conjunction with refinancing its maturing debt obligations in 2012," ratings agency Moody's said on Tuesday, noting the Dubai government is directly exposed to DIFCI, which runs the city's financial freezone, having given it two loans.

The cost to insure 5-year Dubai debt at 415 basis points (bps), was little changed from Monday's close, according to Markit data. – Reuters