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A series of announcements today from the Dubai government and its most heavily indebted conglomerates—Dubai World and Nakheel—were meant to provide clarity on the debt “standstill” announced by the companies late last year. The state-owned firms froze repayments on some US$24bn in debt, including US$14bn owed to bondholders and banks.
The gist of the deal is that the government will allocate US$9.5bn in fresh funds to the companies and convert previous loans into equity (in effect a write-off). Creditors will be asked to accept full principal repayments via new securities with five- and eight-year maturities. Assuming support for the proposals, Nakheel’s bonds due in 2010 and 2011 will be paid according to schedule, the developer of the emirate’s palm-shaped islands said.
Credit markets reacted enthusiastically to the proposals, with the price of Nakheel’s 2011 bond soaring today. Of course, creditors have had their hopes dashed before, judging by the incredibly volatile trade in this and related securities during previous rescue attempts. Can they finally put their concerns to rest?
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A victory for Barclays in Dubai’s first foreclosure case is a welcome development for lenders in the region. Although it marks an important step in the maturity of the emirate’s battered property market, it is unlikely to herald a flood of foreclosures.
Read more at Financial Services Briefing: “Closing time” (January 29th)
Analysts from Egyptian investment bank EFG-Hermes made waves recently with a weighty report that suggested the debt held by Dubai’s government and government-related entities could be up to US$170bn, well above previous estimates. The bulk of this debt is owed by the array of emirate-controlled holding companies, property developers and investment firms that make up “Dubai Inc.” Some of the weaker members of this club have already had high-profile struggles repaying their debts.
The prospect of a potentially larger debt pile facing increasingly wobbly borrowers seems like bad news for local lenders. Indeed, listed banks in Dubai and—to a lesser extent—Abu Dhabi are valued at a discount to their neighbours. (In the chart, P/B is the price-to-book ratio and ROE is return on equity.)
Although a discount is warranted due to lower profitability and a weak economic outlook, EFG-Hermes nevertheless considers the UAE banking sector the “most attractively valued market in the region”. If investors truly are rediscovering an appetite for risky assets, there is no sterner test than Dubai bank shares.
The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.
As markets absorb the implications of Dubai’s debt troubles, analysts have produced a wide range of estimates on banks’ exposure to the emirate. Although few of these figures are based on information provided by the banks themselves, it would appear that western lenders’ exposure to troubled conglomerate Dubai World is not material.
It is probably a different story for local banks, although a newly unveiled support facility from the UAE’s central bank will lessen the impact. What’s for certain is that damage done to investor sentiment in the region will take a long time to recover.
Read more at Financial Services Briefing: “On the hook” (November 30th)
This weekend Muslims across the Gulf will celebrate the Eid al-Adha holiday, when custom calls for the sacrifice of a prized animal. In an extraordinary series of announcements today, Dubai’s creditors saw the value of their holdings sliced. Few are celebrating.
In the morning, the government of Dubai announced that it had raised US$5bn from two Abu Dhabi-based banks, with the proceeds added to US$10bn raised earlier in the year to support businesses in the emirate. Fears about the December repayment of a US$3.5bn bond from Nakheel, the beleaguered builder of palm-shaped island developments, were assuaged further. At the height of anxiety earlier this year, Nakheel’s sukuk (Islamic bond) was trading as low as 65 cents on the dollar. Subsequent fundraising and pledges of government support sent the bond’s price to 110 cents and provided support to a rally in Islamic debt more generally.
But shortly after the government’s first announcement came another communiqué that sent the price of Nakheel’s debt crashing. The billions of dollars raised today, the government said, were for the “general purposes” of the state support fund and not Nakheel. Instead, Nakheel and its parent, Dubai World, would ask creditors for a “standstill” on debt repayment until the end of May next year. A partner from Deloitte would soon start work on restructuring Dubai World, the statement added. Needless to say, this news saw the price of Nakheel’s debt plunge, closing the day at 86 cents on the dollar. Credit-default swaps for Dubai shot upwards. The precarious state of the emirate’s finances will be a popular talking point this holiday season.
UPDATE (Nov 26): The Bloomberg terminal suggests that the bond’s price is now trading in the low 70s. Reuters is reporting that a conference call for Nakheel’s bondholders scheduled for today was postponed after phone lines were overwhelmed. Agreement from investors on the “standstill” request is crucial for Nakheel to avoid a technical default, with grave implications for its parent company, Dubai World, as well as the emirate in general.
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