Dubai Default Swaps Show No Distress on Abu Dhabi’s Bailouts
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Laura Cochrane and Ben Sills
Nov. 30 (Bloomberg) -- Dubai’s debt risk, after jumping the most last week since January, is still below the level signaling a potential failure as investors expect the emirate will be rescued by oil-rich neighbor Abu Dhabi.
The cost of protecting against Dubai’s government reneging on obligations doubled last week after state company Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Investors demand $647,000 a year to insure $10 million of Dubai debt, less than the price of $1 million, or 1,000 basis points, associated with borrowers considered distressed.
Dubai triggered the biggest stock market slump in three months in Asia and Europe’s worst rout since April as the proposal for Dubai World risked adding to the $1.7 trillion of losses and writedowns suffered by banks in the global credit crisis. Commerzbank AG, Bank of America Merrill Lynch and Banque Saudi Fransi, the Saudi lender partly owned by Credit Agricole SA, say Abu Dhabi is likely to bail out Dubai rather than risk driving investors from the region because of a default.
“I’m not desperately worried that we’re going to go into some death spiral,” said Nicholas Field, who helps manage about $11 billion in emerging-market stocks at Schroders Plc in London. “This is not going to turn into some sort of major prolonged move downward.”
The price of Dubai credit-default swaps implies a 24 percent chance the emirate will default on its debt by December 2014, according to JPMorgan Chase & Co. data compiled by Bloomberg.
Central Bank
The United Arab Emirates’ central bank said yesterday it “stands behind” the country’s local and foreign banks and offered them access to more money under a new facility. The Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World while HSBC Holdings Plc has the most at risk in the U.A.E., according to JPMorgan.
The announcement “is a step in the right direction, but this is a bare minimum,” John Sfakianakis, the chief economist at Banque Saudi Fransi in Riyadh, said in an interview yesterday. “This is only dealing with the domestic banking system and they have not yet made any announcement dealing with the debt of Dubai Inc.”
$10 Billion
The central bank, which has its headquarters in Abu Dhabi, the wealthiest of the seven sheikhdoms that make up the U.A.E., bought $10 billion of Dubai bonds in February in a private sale to support the emirate’s state companies. Abu Dhabi-controlled banks added a further $5 billion last week. The assistance is short of the $20 billion Sheikh Mohammed Bin Rashid Al-Maktoum, Dubai’s ruler, said he planned to raise by yearend.
Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, said last week that Dubai’s government announced the Dubai World debt plan in the “full knowledge of how the markets would react” and will provide more information “early” this week, after the Islamic Eid Al Adha holiday.
“There is a strong incentive for Dubai to support its investment companies to ensure an eventual, if not necessarily timely, repayment of its debts,” Luis Costa, an emerging-market debt strategist at Commerzbank in London, said in research report Nov. 27.
Tourist Center
Sheikh Mohammed transformed Dubai from a desert emirate to a financial and tourist center with iconic building projects that included a real-snow ski slope and the world’s tallest tower and biggest man-made islands.
Dubai has a total $4.3 billion of government and corporate debt due next month and $4.9 billion in the first quarter of 2010, Deutsche Bank AG data show.
Dubai World had $59.3 billion in liabilities and $99.6 billion in assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. The government sought a “standstill” agreement from creditors last week on debt that includes $3.52 billion of bonds due Dec. 14 from Dubai World’s property unit Nakheel PJSC.
Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies, saying they may consider Dubai World’s plan to delay payments a default.
Creditors
Dubai World’s biggest creditors outside the emirate include Abu Dhabi Commercial Bank, which is owed about $1.9 billion, according to two people familiar with the situation who declined to be identified because the information isn’t publicly available. British banks have the most to lose among international lenders from a crisis in the U.A.E., with a combined $49.5 billion of loans outstanding, according to a report from Royal Bank of Scotland Group that cites Bank for International Settlements data in June.
Sheikh Mohammed said Nov. 9 that those who doubt the unity of Dubai and Abu Dhabi, which holds 8 percent of the world’s oil reserves, should “shut up.”
The cost of protecting Dubai bonds against default is the fifth-highest worldwide after Pakistan and Argentina, and exceeds Iceland’s and Latvia’s, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record to 744 basis points last week.
The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. One basis point, or 0.01 percentage point, is equivalent to $1,000 a year on a contract protecting $10 million of debt.
While volatility is likely to “dissipate fairly quickly,” Commerzbank said there’s a higher likelihood of spreads widening over the next four weeks than tightening.
Bonds Fall
Dubai’s dollar-denominated Islamic bonds due 2014 dropped to 89 cents on the dollar yesterday from 101 cents a week earlier, according to Royal Bank of Scotland data on Bloomberg. The decline pushed yields on the debt to 9.226 percent, below the 10 percent level considered distressed by investors. The government sold the bonds last month, raising $1.93 billion.
The price of Nakheel’s bonds fell to 50 cents on the dollar on Nov. 27 from 110.5 cents a week earlier, according to Citigroup Inc. prices on Bloomberg.
“Will the U.A.E. allow Dubai to default? For Dubai World, the answer seems absolutely yes,” said David Lewis, an emerging-market credit analyst in global research at Bank of America Merrill Lynch in London. “For the Dubai sovereign itself, we would think that Abu Dhabi would be very reluctant to see it default.”
‘Burden Sharing’
Sheikh Mohammed earlier this month removed the chairmen of Dubai Holding LLC and Dubai World, two state- owned business groups, as well as the head of the U.A.E.’s biggest developer Emaar Properties PJSC from the board of the Investment Corp. of Dubai, the emirate’s main holding company. He also ejected the governor of the Dubai International Financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into the Middle East finance hub.
“A fairly high degree of ‘burden sharing’ might be required from the investor base,” Commerzbank’s Costa said. “Given the levels of haircut in other recent emerging-market restructuring deals, a 40 to 50 percent destruction of principal would not be absurd at all.”
Sergio Trigo Paz, chief investment officer for emerging markets at Fortis Investments, the asset management unit of Fortis Bank SA/NV, which oversees $244 million globally, said he’s considering buying Nakheel’s bonds. Fortis bought bonds of Kazakhstan’s biggest lender BTA Bank, which is seeking to restructure as much as $13.3 billion of debt, Trigo Paz said. He also holds Qatar and Kuwait bonds.
“Some people are betting that buying Nakheel under 50 is a very good six-month trade,” Trigo Paz said in an interview. “We are actually doing some shopping on the collateral damage with very good sovereigns. We are starting to look at Nakheel.”
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Laura Cochrane and Ben Sills
Nov. 30 (Bloomberg) -- Dubai’s debt risk, after jumping the most last week since January, is still below the level signaling a potential failure as investors expect the emirate will be rescued by oil-rich neighbor Abu Dhabi.
The cost of protecting against Dubai’s government reneging on obligations doubled last week after state company Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Investors demand $647,000 a year to insure $10 million of Dubai debt, less than the price of $1 million, or 1,000 basis points, associated with borrowers considered distressed.
Dubai triggered the biggest stock market slump in three months in Asia and Europe’s worst rout since April as the proposal for Dubai World risked adding to the $1.7 trillion of losses and writedowns suffered by banks in the global credit crisis. Commerzbank AG, Bank of America Merrill Lynch and Banque Saudi Fransi, the Saudi lender partly owned by Credit Agricole SA, say Abu Dhabi is likely to bail out Dubai rather than risk driving investors from the region because of a default.
“I’m not desperately worried that we’re going to go into some death spiral,” said Nicholas Field, who helps manage about $11 billion in emerging-market stocks at Schroders Plc in London. “This is not going to turn into some sort of major prolonged move downward.”
The price of Dubai credit-default swaps implies a 24 percent chance the emirate will default on its debt by December 2014, according to JPMorgan Chase & Co. data compiled by Bloomberg.
Central Bank
The United Arab Emirates’ central bank said yesterday it “stands behind” the country’s local and foreign banks and offered them access to more money under a new facility. The Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World while HSBC Holdings Plc has the most at risk in the U.A.E., according to JPMorgan.
The announcement “is a step in the right direction, but this is a bare minimum,” John Sfakianakis, the chief economist at Banque Saudi Fransi in Riyadh, said in an interview yesterday. “This is only dealing with the domestic banking system and they have not yet made any announcement dealing with the debt of Dubai Inc.”
$10 Billion
The central bank, which has its headquarters in Abu Dhabi, the wealthiest of the seven sheikhdoms that make up the U.A.E., bought $10 billion of Dubai bonds in February in a private sale to support the emirate’s state companies. Abu Dhabi-controlled banks added a further $5 billion last week. The assistance is short of the $20 billion Sheikh Mohammed Bin Rashid Al-Maktoum, Dubai’s ruler, said he planned to raise by yearend.
Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, said last week that Dubai’s government announced the Dubai World debt plan in the “full knowledge of how the markets would react” and will provide more information “early” this week, after the Islamic Eid Al Adha holiday.
“There is a strong incentive for Dubai to support its investment companies to ensure an eventual, if not necessarily timely, repayment of its debts,” Luis Costa, an emerging-market debt strategist at Commerzbank in London, said in research report Nov. 27.
Tourist Center
Sheikh Mohammed transformed Dubai from a desert emirate to a financial and tourist center with iconic building projects that included a real-snow ski slope and the world’s tallest tower and biggest man-made islands.
Dubai has a total $4.3 billion of government and corporate debt due next month and $4.9 billion in the first quarter of 2010, Deutsche Bank AG data show.
Dubai World had $59.3 billion in liabilities and $99.6 billion in assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. The government sought a “standstill” agreement from creditors last week on debt that includes $3.52 billion of bonds due Dec. 14 from Dubai World’s property unit Nakheel PJSC.
Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies, saying they may consider Dubai World’s plan to delay payments a default.
Creditors
Dubai World’s biggest creditors outside the emirate include Abu Dhabi Commercial Bank, which is owed about $1.9 billion, according to two people familiar with the situation who declined to be identified because the information isn’t publicly available. British banks have the most to lose among international lenders from a crisis in the U.A.E., with a combined $49.5 billion of loans outstanding, according to a report from Royal Bank of Scotland Group that cites Bank for International Settlements data in June.
Sheikh Mohammed said Nov. 9 that those who doubt the unity of Dubai and Abu Dhabi, which holds 8 percent of the world’s oil reserves, should “shut up.”
The cost of protecting Dubai bonds against default is the fifth-highest worldwide after Pakistan and Argentina, and exceeds Iceland’s and Latvia’s, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record to 744 basis points last week.
The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. One basis point, or 0.01 percentage point, is equivalent to $1,000 a year on a contract protecting $10 million of debt.
While volatility is likely to “dissipate fairly quickly,” Commerzbank said there’s a higher likelihood of spreads widening over the next four weeks than tightening.
Bonds Fall
Dubai’s dollar-denominated Islamic bonds due 2014 dropped to 89 cents on the dollar yesterday from 101 cents a week earlier, according to Royal Bank of Scotland data on Bloomberg. The decline pushed yields on the debt to 9.226 percent, below the 10 percent level considered distressed by investors. The government sold the bonds last month, raising $1.93 billion.
The price of Nakheel’s bonds fell to 50 cents on the dollar on Nov. 27 from 110.5 cents a week earlier, according to Citigroup Inc. prices on Bloomberg.
“Will the U.A.E. allow Dubai to default? For Dubai World, the answer seems absolutely yes,” said David Lewis, an emerging-market credit analyst in global research at Bank of America Merrill Lynch in London. “For the Dubai sovereign itself, we would think that Abu Dhabi would be very reluctant to see it default.”
‘Burden Sharing’
Sheikh Mohammed earlier this month removed the chairmen of Dubai Holding LLC and Dubai World, two state- owned business groups, as well as the head of the U.A.E.’s biggest developer Emaar Properties PJSC from the board of the Investment Corp. of Dubai, the emirate’s main holding company. He also ejected the governor of the Dubai International Financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into the Middle East finance hub.
“A fairly high degree of ‘burden sharing’ might be required from the investor base,” Commerzbank’s Costa said. “Given the levels of haircut in other recent emerging-market restructuring deals, a 40 to 50 percent destruction of principal would not be absurd at all.”
Sergio Trigo Paz, chief investment officer for emerging markets at Fortis Investments, the asset management unit of Fortis Bank SA/NV, which oversees $244 million globally, said he’s considering buying Nakheel’s bonds. Fortis bought bonds of Kazakhstan’s biggest lender BTA Bank, which is seeking to restructure as much as $13.3 billion of debt, Trigo Paz said. He also holds Qatar and Kuwait bonds.
“Some people are betting that buying Nakheel under 50 is a very good six-month trade,” Trigo Paz said in an interview. “We are actually doing some shopping on the collateral damage with very good sovereigns. We are starting to look at Nakheel.”
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