http://www.bloomberg.com/apps/news?pid=20601087&sid=azd17alFNikQ&pos=2Dubai Debt Delay Rattles Confidence in Gulf Borrowers (Update2)
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By Laura Cochrane and Tal Barak Harif
Nov. 26 (Bloomberg) -- Dubai is shaking investor confidence across the Persian Gulf after its proposal to delay debt payments risked triggering the biggest sovereign default since Argentina in 2001.
The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Bonds of its property unit, Nakheel PJSC, mature Dec. 14. Dubai contracts climbed 124 basis points to 564, the most since they began trading in January, adding to 122 yesterday, CMA Datavision prices showed.
“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”
Moody’s Investors Service and Standard & Poor’s cut the ratings on state companies yesterday, saying they may consider state-controlled Dubai World’s plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed $80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region’s tourism and financial hub.
‘Further Defaults’
“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.
Stocks, bonds and currencies fell across developing countries. The MSCI Emerging Markets Index of stocks dropped 1.1 percent, led by declines in China and Russia. South Africa’s rand weakened 1.3 percent against the dollar and the Turkish lira slumped 1.1 percent. Hungary’s forint lost 1.2 percent per euro. Credit-default swaps on Russia increased to 206.5 basis points from 192.
Gulf region default swaps jumped, with contracts linked to Bahrain rising 32.5 basis points today to 227, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 27 basis point higher at 164 at 10:10 a.m. in London, according to London-based CMA. Qatar default swaps advanced 23 basis points to 115, adding to yesterday’s 11 basis- point increase.
Saudi Debts
Saudi Arabia contracts climbed the most since February, adding 20 basis points to 110.3. The British Bankers’ Association asked the U.K. government to intervene with Saudi authorities over debts of at least $20 billion owed to as many as 100 banks by Saad Group and Ahmad Hamad Algosaibi & Brothers Co., two family holding companies based in the oil city of Al- Khobar, according to a letter dated Nov. 20.
Credit-default swaps 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. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.
Dubai’s contracts, which increase as perceptions of credit quality deteriorate, are the fifth most expensive worldwide, exceeding Iceland’s and Latvia’s.
Argentina Default
Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record 181 basis points to 540.5 yesterday and were priced at 539.5 today, according to CMA data. “DP World and its debt are not included in the restructuring process for Dubai World,” the government said in a statement to Nasdaq Dubai today.
The price of Nakheel’s bonds fell to 74 cents on the dollar from 85 yesterday and 107 a week ago, according to Goldman Sachs Group Inc. prices on Bloomberg.
UBS AG, Switzerland’s largest bank, said it expects the U.A.E. will prevent a default by Nakheel. Dubai is one of seven sheikhdoms in the U.A.E. that includes Abu Dhabi, which holds 8 percent of the world’s oil reserves and bought $5 billion of bonds sold by Dubai yesterday through state-controlled banks.
Unlike Argentina, which stopped payments on $95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubai’s announcement yesterday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays Plc.
Standstill Agreement
The government raised $1.93 billion last month in its first sale of Islamic bonds, attracting more than $6.3 billion of orders. The dollar-denominated securities due 2014, which are governed by Shariah laws barring investors from profiting from the exchange of money, dropped to 8.1 percent today to 89.5 cents, lifting the yield to 9.1 percent from 6.2 percent on Nov. 24, according to ING Groep NV prices on Bloomberg.
“The uncertainty and unpredictability around upcoming debt repayments implied by” yesterday’s announcement “will add to pressure on Dubai spreads, which may lead to a re-pricing of Dubai and U.A.E. risk,” Moubayed wrote in a report yesterday.
Dubai World will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due Dec. 14 from Nakheel, Dubai’s Department of Finance said in an e-mailed statement yesterday.
Sheikh Mohammed removed the chairman of Dubai World from the board of Dubai’s main holding company, the Investment Corporation of Dubai, last week. Dubai World had $59.3 billion in liabilities and $99.6 billion in total assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai owes $4.3 billion next month and $4.9 billion in the first quarter of 2010 through government and corporate debt, Deutsche Bank AG data show.
‘Brink of Failure’
“Nakheel is now standing on the brink of failure given the astonishing amount of cash Dubai would have to inject on it in order to see the enterprise survive,” said Luis Costa, emerging-market debt strategist at Commerzbank AG in London. “Events like this are a perfect storm.”
Dubai World’s more than 70 creditors face the prospect of writedowns on as much as $60 billion of debt if they haven’t unloaded their holdings and the state-owned company fails to win additional support from Abu Dhabi.
The biggest creditors are Abu Dhabi Commercial Bank and Emirate NBD PJSC. Other lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation.
“Our exposure is immaterial,” said Credit Suisse spokesman Marc Dosch. HSBC and Lloyds declined to comment when contacted by Bloomberg. Spokesmen at RBS and Barclays were not immediately available to comment.
Rating Downgrades
Emaar Properties PJSC, U.A.E.’s biggest developer, was cut by four levels to Ba2, two steps below investment grade, by Moody’s. Jebel Ali Free Zone, an operator of business parks, and DIFC Investments were also lowered to speculative-grade by Moody’s yesterday. DP World and Dubai Electricity & Water Authority were downgraded two levels to Baa2, the second rank above junk. Moody’s and S&P said they may cut ratings further.
The debt “restructuring may be considered a default under our default criteria,” S&P said in a statement.
Borrowing from Abu Dhabi state banks accounted for half the $10 billion Dubai ruler Sheikh Mohammed said he planned to raise by yearend. He said Nov. 9 the program will be “well received,” and those who doubt the unity of Dubai and Abu Dhabi should “shut up.”
Sheikh Mohammed turned to Abu Dhabi’s central bank on Feb. 23 to raise $10 billion by selling debt. The emirate’s credit default swaps dropped 178 basis points that day, after trading for a record 976 basis points.
“It’s very important to resolve this in a way that will minimize contagion across the region,” Matrix Group’s Loftus said.
To contact the reporter on this story: Arif Sharif in Dubai at
[email protected]Last Updated: November 26, 2009 07:27 EST
Topic: Dubai deafaults on $60B "Shariah Debt", and shatters global markets (Read 571 times)