Dec. 2 (Bloomberg) -- Dubai’s credit risk fell the most in nine months after state-controlled Dubai World began talks on restructuring less than half its total liabilities and said the rest of its obligations are on “a stable financial footing.”
The cost to protect against a default by Dubai dropped 113 basis points to 457 yesterday, the biggest one-day decline since Feb. 23, according to credit-default swap prices from CMA Datavision. Debt from Dubai World subsidiaries including Infinity World Holding, Istithmar World and Ports & Free Zone World aren’t part of restructuring negotiations, the company said in a statement on Nov. 30.
Dubai World is seeking to delay payments on less than half its $59 billion of liabilities, easing the potential damage to banks recovering from $1.7 trillion of losses and writedowns from the global crisis. Shares worldwide recovered some of the losses suffered since Dubai announced it would seek a “standstill” agreement on all of Dubai World’s debt as the MSCI World Index gained 2 percent yesterday, the most in three weeks.
“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.”
A creditor group including HSBC Holdings Plc, Standard Chartered Plc, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc has formed a steering committee and will meet with representatives of Dubai World on Sunday or Monday, the Financial Times reported yesterday, citing a person familiar with the matter.
‘Minor Problem’
Dubai’s ruler and United Arab Emirates Prime Minister Sheikh Mohammed Bin RashidAl Maktoum said the world misunderstood the government’s intention when it said state-run holding company Dubai World would renegotiate debt repayments, according to Al Arabiya television yesterday.
The debt Dubai World plans to restructure includes about $6 billion of Islamic bonds sold by Nakheel, according to the Dubai World statement.
“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.”
EM Bond Rally
Debt and shares worldwide have been rebounding after Europe suffered its biggest one-day stock market slump since April last week on investor concern Dubai’s debt delay might cause the biggest emerging-market default since Argentina in 2001. The MSCI Emerging Market Index of stocks climbed 2.1 percent, the most since Nov. 9, to 973.31 yesterday.
The extra yield investors demand to own emerging-market bonds instead of U.S. Treasuries declined 14 basis points to 3.15 percentage points yesterday, according to JPMorgan Chase & Co.’s EMBI+ Index. Lebanon sold $500 million of bonds in overseas credit markets yesterday.
The $26 billion figure “confirms that it’s a relatively minor problem,” said Michael Atkin, who helps oversee $10 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston. Dubai’s struggles serve as a “reminder that we’re not yet out of the woods in the global financial system. It raises the issue of what else is out there,” he said.
Royal Bank of Scotland was the biggest underwriter of Dubai World loans while HSBC has the most at risk in the U.A.E., according to JPMorgan Chase & Co. Spokespeople for RBS and HSBC declined to comment.
Moody’s
Banks have begun negotiating with Dubai World because they “are wary of any alternative including calling Dubai World in default,” said Hani Sabra, an associate covering the Middle East for New York-based research firm Eurasia Group.
Total government and government-related debt in Dubai could be about $100 billion, including an estimated $34.22 billion at Dubai World and its units, Moody’s Investors Service said in an e-mailed report yesterday. The rating assessor said it expects no material loss at any of the international banks exposed to Dubai World.
“The only consequence that we expect to result from this event is a change in investors’ perception of the risks associated to Dubai and the United Arab Emirates, and a re- pricing of risks and opportunities,” Moody’s said in the statement. Dubai’s corporate landscape is now effectively a high-yield market, Moody’s added.
Default Swaps
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 on Nov. 30 there was “no need to worry” about lenders in the Persian Gulf nation.
Default swaps for Abu Dhabi narrowed 15 basis points to 129 and contracts linked to DP World Ltd. dropped 113 to 519 yesterday.
The contracts, which fall as perceptions of credit quality improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.
Shares in the emirates fell, with Abu Dhabi’s measure wiping out its gains since May in a record 12 percent two-day slump. The Dubai Financial Market index declined 5.6 percent. Qatar’s DSM20 Index lost 8.3 percent in its first trading day since the Nov. 25 restructuring announcement.
Support Fund
The Dubai government said Nov. 25 its Financial Support Fund will spearhead the workout for 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.
Bondholders of Nakheel PJSC, whose Islamic bond is due Dec. 14, have formed a creditor group that represents more than 25 percent of the debt, said Jo Shepherd, head of public relations at Ashurst LLC, which was appointed legal adviser. The group is considering its options, Shepherd said in an interview on Nov. 30. More than 75 percent consent from creditors is needed to approve extraordinary resolutions.
The Nakheel 3.17 percent bonds, known as sukuk, fell to 55 cents on the dollar from 58, according to Citigroup Inc. prices on Bloomberg. The bonds, governed by Shariah laws barring investors from profiting from the exchange of money, traded for 110.5 cents on Nov. 23 and as low as 42 cents on the dollar Nov. 27.
Creditor Incentive
“Even though it is going to be tough to restructure $26 billion of debt, Dubai World’s creditors have an incentive to do so in order to reduce the haircut that they will have to take,” said Rachel Ziemba, a senior analyst covering sovereign wealth funds at Roubini Global Economics, a New York-based research firm. “Time is short but they might still avoid defaulting on Nakheel’s $3.5 billion bonds due on Dec. 14.”
Dubai’s government told creditors of Dubai World on Nov. 30 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 on Dubai World’s debt payments is “in the interest of all parties, the investors the creditors and the contractors,” he said.
Housing Slump
Dubai, the second-biggest of seven emirates 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.
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 slide 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.
Infinity World is a special purpose vehicle to buy Dubai World’s stake in U.S. casino company MGM Mirage in 2007. Ports & Free Zone World owns DP World Ltd., Economic Zones World, P&O Ferries and Jebel Ali Free Zone.
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.
$5 Billion Borrowed
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 covenants on two loans backed by London’s Adelphi office building on Oct. 19, the issuer said in a statement on Nov. 30.
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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