Dubai World to Restructure $26 Billion of Debt

Escrito el 30 noviembre 2009 por Antonio Rivela Rodríguez en Uncategorized

According to 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 to protect against Dubai reneging on obligations doubled last week after state company Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. The amount investors demand to insure $10 million of Dubai debt fell to $589,000 per year today from $647,000, 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 andEurope’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,” saidNicholas 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 32.5 percent chance the emirate will default on its debt by December 2014, according to CMA Datavision figures that assume a 25 percent recovery rate.

Central Bank

Dubai hasn’t guaranteed the debt of Dubai World, Abdulrahman Al Saleh, director general of Dubai’s Department of Finance, said in an interview with state-run Dubai TV today.

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 Chase & Co.

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 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 Nakheel’s bonds.

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.

Nakheel PJSC, the Dubai World property unit that has $3.52 billion of bonds due in two weeks, asked Nasdaq Dubai to suspend the securities “until it is in a position to fully inform the market,” according to a statement to the bourse today.


Nakheel may still meet the Dec. 14 deadline to repay bondholders, Abu-based newspaper The National reported Nov. 28, without citing anyone. Options considered by Aidan Birkett, the Deloitte LLP managing partner hired as chief restructuring officer for Dubai World debt, also include offering holders of the sukuk an 80 percent redemption and a similar offer to bankers, the newspaper said.

The price of Nakheel’s bonds dropped 1.7 percent today to 58 cents on the dollar, according to Citigroup Inc. prices on Bloomberg. The securities traded at 110.5 cents a week ago and reached an intraday low of 42 cents on Nov. 27.

Dubai’s dollar-denominated Islamic bonds due 2014 rose to 89.993 cents on the dollar today from 89.680, according to ING Groep NV data on Bloomberg, reducing the yield to 8.954 percent, below the 10 percent level considered distressed by investors. The government sold the bonds last month, raising $1.93 billion.


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 sixth-highest worldwide after Pakistan, Argentina and Latvia, and exceeds Iceland’s, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, fell 93 basis points today to 651 after jumping by a record to 744 basis points last week.

‘Burden Sharing’

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.

“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.”

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.

Buying Bonds

“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.”

Sergio Trigo Paz, chief investment officer for emerging markets at Fortis Investments, the asset management unit of Fortis Bank SA/NV, which oversees $3 billion globally, said he’s considering buying Nakheel’s bonds. The bank’s $3.8 billion convertible bond fund, run separately from Trigo Paz’s investments, will keep its $3 million holding of the bonds, portfolio constructor Benoit Ruelle said in an interview.

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.”

Nakheel may extend the maturity on its bonds due in two weeks by about five years, Louis Gargour, chief investment officer of hedge fund LNG Capital LLP. Gargour bought some of the debt after prices dropped last week and has since sold the position, he said in an interview.

Dubai World said it began “constructive” talks with banks to restructure $26 billion of debt, including liabilities owed by units Nakheel World and Limitless World.

Debt from subsidiaries such as Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations because those companies “are on a stable financial footing,” Dubai World, one of the emirate’s three main state-related holding companies, said in a statement.

The company is seeking to delay payments on less than half its $59 billion of debt, damping concern that its potential default may set back the global financial system’s recovery from the credit crisis that sank the world economy into recession. Stocks erased losses in the U.S. after the announcement, sending theStandard & Poor’s 500 Index up 0.4 percent.

“Now that they’re saying $26 billion, it reduces some of the panic that built up in the last few days,” said Nick Chamie, an analyst at RBC Capital Markets in Toronto. “This is positive. The market was feeding on its own concern and there were talks of $60 billion debt that would need to be restructured.”

The cost of protecting against a default by Dubai fell yesterday for the first time in a week. The country’s credit- default swaps declined 75 basis points to 571 basis points, according to prices from CMA Datavision. Default swaps, which fall as the perception of credit quality improves, for Abu Dhabi narrowed 34 basis points to 144 and contracts linked to DP World Ltd. dropped 109 basis points to 631. A basis point equals 0.01 percentage point.

‘Minor Problem’

Dubai shares tumbled and Abu Dhabi’s stock index fell the most in at least eight years yesterday on the first trading day since the government announced state-run Dubai World may delay debt payments. The Dubai Financial Market General Index dropped 7.3 percent to 1,940.36, the biggest decline since October 2008. Abu Dhabi’s ADX Index fell 8.3 percent, the most since Bloomberg began compiling the data in 2001.

The Nov. 25 announcement triggered the biggest stock market slump in three months in Asia and Europe’s worst rout since April as the debt request risked adding to the $1.7 trillion of losses and writedowns suffered by banks in the global crisis.

The $26 billion figure “is slightly smaller than I thought,” said Michael Atkin, who helps oversee $10 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston. “That confirms that it’s a relatively minor problem. Dubai was never big enough to be a systemic shock to the global system.”

U.A.E. Support

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 Chase & Co.

The United Arab Emirates’ central bank said Nov. 29 it “stands behind” the country’s local and foreign banks and offered them access to more money under a new facility. U.A.E. Central Bank Governor Sultan Al-Suwaidi told Abu Dhabi TV yesterday there was “no need to worry” about lenders in the Persian Gulf nation.

The amount of obligations Dubai World plans to restructure includes about $6 billion of Islamic bonds sold by Nakheel, according to the statement. The debt, known as sukuk, is governed by Shariah laws barring investors from profiting from the exchange of money.

Creditor Group

“Initial discussions have commenced with the banks of Dubai World and are proceeding on a constructive basis,” Dubai World said in the statement. “It is envisaged the restructuring process will be carried out in an equitable way for the overall benefit of all stakeholders.”

The Dubai government said Nov. 25 its Financial Support Fund will spearhead the restructuring of state-owned Dubai World and named Aidan Birkett of Deloitte LLP as its chief restructuring officer. The government said Dubai World would seek an extension of loan maturities until at least May 30, 2010. More than 75 percent consent from creditors is needed to approve extraordinary resolutions.

Bondholders of Nakheel PJSC, Dubai World’s property unit whose $3.52 billion Islamic bond is due Dec. 14, formed a creditor group that represents more than 25 percent of that debt, according to Jo Shepherd, head of public relations at Ashurst LLC, which was appointed legal adviser. The group is considering its options, Shepherd said.

$80 Billion

Bondholders will “want a detailed plan as to how and what the repayment strategy will be and what the eventual source of repayment will be,” said Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd, before the Dubai World statement was released.

Dubai’s government told creditors of Dubai World yesterday that they should help in a restructuring the holding company because it hasn’t guaranteed the debt.

“The lenders should bear part of the responsibility,” the director general of the emirate’s finance department, Abdulrahman Al Saleh, said on state-run Dubai TV. The government’s Nov. 25 decision to seek a halt Dubai World’s debt payments is “in the interest of all parties, the investors the creditors and the contractors,” he said.

Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund a boom in growth and diversify the economy. The global financial turmoil and a decline in property prices hurt companies such as Dubai World as they struggled to raise loans.

Housing Slump

The company received financing based on the “viability of its projects, not on government guarantees,” Al Saleh said.

Home prices in Dubai plummeted 47 percent in the second quarter from a year ago, the steepest drop of any market, according to Knight Frank LLC. Property prices may drop further, a survey by Colliers International showed Oct. 14.

Istithmar World, Dubai World’s investment unit, bought New York luxury retailer Barneys in 2007 for $942.3 million. Dubai World agreed in 2008 to invest about $5.1 billion in U.S. casino company MGM Mirage as part of a plan to diversify the emirate’s economy into entertainment and financial services.

Dubai, home to the world’s tallest tower, set up a $20 billion Dubai Financial Support Fund after the seizure in credit markets. Dubai said Nov. 25 it borrowed $5 billion from Abu Dhabi government-controlled banks for the fund, after raising $10 billion by selling bonds to the U.A.E. central bank in February.

Ratings Cuts

Dubai’s government raised $1.93 billion in October from the biggest sale of Islamic bonds from the Gulf Arab region this year, and paid off a $1 billion Dubai Civil Aviation Authority sukuk due Nov. 4. The sheikhdom and its state-owned companies have to repay $9.2 billion of bonds and loans maturing in 2010, $19.8 billion in 2011 and $17.3 billion in the following year, Deutsche Bank AG said in report in August.

Istithmar World breached the covenants on 895 million pounds ($1.5 billion) of loans backed by London’s Adelphi office building, the issuer said in a statement.

Moody’s and Standard & Poor’s cut their ratings on Dubai state companies, saying they may consider Dubai World’s plan to delay payments a default.

“The times of implicit support are clearly over,” said Philipp Lotter, vice-president of Moody’s Investors Service in Dubai. “In the past, entities such as Dubai World certainly represented themselves as quasi-government entities, whereas there was no legal obligation on behalf of the government to support, and that has certainly shifted with last week’s announcement.”


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