Dubai Plans Appeal to Bondholders

by snuffysmith | November 29, 2009 at 09:21 am

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Dubai’s government is preparing a campaign to persuade the holders of a bond due for repayment next month to agree to a delay even if that sparks claims that the emirate has defaulted on the debts of a government-backed company, bankers said on Sunday.

Pushing aside concerns about potential legal action, the department of finance is preparing to communicate with the public and with the bondholders of an upcoming $4bn sukuk, or Islamic bond, issued by Nakheel, a major real estate developer, via the new chief restructuring officer of Dubai World, Nakheel’s parent.

The critical issue isn't going to be the bondholders, but the counterparties.

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snuffysmith

at 07:11 on November 30th, 2009

UAE Central Bank Makes Reassuring Noises

The United Arab Emirates offered a reassuring statement today after sending a bit more tough-minded message yesterday.

The markets will not doubt take heart from the cheery word today, but we need to remind ourselves that the fat lady hasn’t sung yet. Unlike the conduct of banking authorities in the US towards their wayward charges, it isn’t clear that the UAE is prepared to write blank checks to Dubai.

Let’s first look at the somewhat tough talk of yesterday. From the Telegraph:

“We will look at Dubai’s commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts,” a senior Abu Dhabi official said.

Now consider the posture today, per Bloomberg:

The United Arab Emirates’ central bank eased credit for lenders and said it “stands behind” the country’s local and foreign banks as they face losses from Dubai World’s possible default….

U.A.E. banks are already facing rising loan losses stemming from the global recession as the economy slowed and two Saudi Arabian business groups defaulted on at least $15.7 billion of loans. Provisions for bad loans at U.A.E. banks rose to 2.76 percent of the total as of the end of October from 1.92 percent a year ago, according to central bank data.

The U.A.E.’s banking system is “more sound and liquid than a year ago” and local banks’ sale of medium-term notes and commercial paper in foreign markets has declined by 25 percent over the period, the central bank said. Foreign interbank deposits make up only 5 percent of the total, it said.

Dubai World, which owns property developer Nakheel PJSC, the builder of palm-tree shaped islands off the emirate’s coast, has $40 billion of debt, two bankers familiar with the company said Oct. 21, declining to be identified because the information is private. Some $18 billion of Dubai World’s debt is with companies such as port operator DP World Ltd. that have sufficient cashflow to service their loans, the bankers said. The remaining $22 billion is of greater concern, they said.

Yves here. So far, so good, but consider: the central bank support extends to banks, not to Dubai World. That means today’s statement is not necessarily a contradiction of the remarks yesterday. The restructuring of Dubai World still appears to be on, and that in turn appears to constitute a credit event on the credit default swaps that reference the relevant entities.

The Financial Times’ tone was more cautious than Bloomberg’s:

The UAE central bank set up an emergency liquidity facility to ease fears about its banking system, but investors remained nervous about the short-term impact on local markets as regional traders digested the global sell-off caused by the announcement that one of Dubai’s flagship entities – Dubai World – was seeking a standstill deal with creditors until May….

Meanwhile, Dubai World is preparing to persuade bondholders of Nakheel, its real estate unit, to roll over that maturity while the government is planning a charm offensive to repair damage caused by a standstill call that followed months of officials downplaying concerns over Dubai’s ability to meet obligations on its $80bn (£48bn) debt pile.

UAE authorities were in talks with Dubai officials over the weekend to formulate a response to investor fears and limit damage to the UAE economy.

Nakheel is due to pay $4bn on its Islamic bond next month, while the parent company has total liabilities of $59bn.

Bankers have been waiting to see if Abu Dhabi, the wealthy capital that bankrolls the central bank and is key to Dubai’s financial well-being, will intervene. But Abu Dhabi has always insisted that such issues have to be dealt with at a federal level….

Reaction to the central bank’s statement was mixed.

Marios Maratheftis, Gulf economist at Standard Chartered, said the move was positive, with the central bank acting proactively to send “a signal to banks and the world that they are behind the banks”.

Raj Madha, banking analyst at EFG-Hermes, welcomed it as a first step, but said the central bank might have to do more.

And there is a wild card in the mix. Lifted from a comment by RueTheDay in an earlier post:

There is an interesting angle here that isn’t being widely reported in the media, at least not yet.

These “bonds” are actually Sukuks, which are a type of Islamic Finance intended to get around the Islamic law that forbids the charging of interest on debt. They’ve only existed for around 7 years. It’s actually not a bond at all. They create an SPV for the issuing entity that owns all of its assets, the sukuks represent what appears to be an equity interest in the SPV backed by the underlying assets, and the payments are not “interest” but rather “rent” for the use of the assets. No idea what the courts will make of this in the event of a default.

So there is a possibility that this structure will be tested in the default and found to be wanting. And that could redound to all other debt like this. Remember when suddenly no one wanted anything to do with anything that might be tainted with subprime?

Independent of any rescue, a lot of investors and lenders will lose out on the collapse of the Dubai bubble. So the jury is still out on the ultimate costs.

Update 11:00 PM: Reuters, weighing in later, gave an even less positive reading:

But the move to inject liquidity into Dubai’s banks by the central bank of the Gulf Arab state, together with promises by neighboring city-state Abu Dhabi to provide selective support to Dubai companies was seen as by analysts as the bare minimum.

snuffysmith

at 07:27 on November 30th, 2009

Summary and a Look Ahead Calculated Risk, November 29, 2009 The week will start with questions about Dubai, and a Treasury announcement on Monday about a plan to put pressure on lenders to complete modifications.

snuffysmith

at 08:32 on November 30th, 2009

Much Ado About Dubai The panic over its debt problem tells us more about investors than it does about the emirate.http://online.wsj.com/article/SB10001424052748703499404574564420658960540.html?mod=rss_opinion_main

snuffysmith

at 08:34 on November 30th, 2009

Longer-Term Treasurys Weaker As Dubai Worries Calm http://online.wsj.com/article/SB10001424052748703939404574567692994481868.html

snuffysmith

at 08:34 on November 30th, 2009

Dollar Recovers Ground as Dubai Fears Linger http://online.wsj.com/article/SB10001424052748703939404574567322628084670.html?mod=googlenews_wsj

snuffysmith

at 09:46 on November 30th, 2009

Dubai, debt and a return to realityfrom Asia Times Online The trouble with debt-burdened Dubai isn't that its woes could trigger serious shocks around the global financial system. Rather, irrespective of liquidity conditions, the world remains an unforgiving place for those who borrowed too much and gave up too little in return. Various other notions, such as "too big to fail" and "implicit guarantee", will soon fall by the wayside.

snuffysmith

at 09:48 on November 30th, 2009

Dubai watchfrom Asia Times Online The unfolding of Dubai World's debt crisis had investors wondering whether this was a case of brinksmanship or the catalyst for a new round of credit market tumult. Meanwhile, much of the rest of the world, not least New York, still struggles from the previous round of chaos. - Doug Noland looks at the previous week's events each Monday.

snuffysmith

at 09:50 on November 30th, 2009

Dubai: Government Will Not Stand Behind Dubai World Debtfrom Calculated Risk by CalculatedRiskFrom The Times: Investors face huge losses as Dubai abandons debt company

The Government of Dubai said today that it will not stand behind its wholly-owned subsidiary Dubai World, prompting fears that the company’s creditors could lose billions of dollars.

Today's comment, from Abdulrahman al-Saleh, the director general of Dubai’s Department of Finance, effectively confirms that country does not have enough money to repay Dubai World’s $60 billion of liabilities. ...

From the Financial Times: Dubai official confirms no guarantee

From MarketWatch: Dubai World debt not backed by government:official

snuffysmith

at 10:45 on November 30th, 2009

Dubai Government Will Not Back Debts of Troubled Investment Firmfrom VOA News: Top Stories by VOA NewsA top finance official in Dubai says the emirate's government will not guarantee the debts of the heavily-indebted, state-owned conglomerate Dubai World.

snuffysmith

at 10:46 on November 30th, 2009

Dubai Markets Falter Under Debt Crisisfrom VOA News: Top Stories Financial markets in Dubai and other Arab emirates plunged about seven percent early Monday, with investors worried about Dubai's ability to pay back $60 billion in debt

snuffysmith

at 19:19 on November 30th, 2009

Crisis in Dubai: The Nightmare Scenario
By Mike Whitney

Abu Dhabi wants to send its wastrel younger brother a wake-up-call by forcing Dubai to restructure its debt. That means that banks, bondholders and contractors will have to take a haircut, which is not surprising given the abysmal condition of the commercial real estate market. Continue

http://www.informationclearinghouse.info/article24090.htm

snuffysmith

at 08:07 on December 1st, 2009

More on Dubai Fallout:

The Ascent, and Fall, of Dubai
Edward L. Glaeser, Economix, December 1, 2009
An economist explores the urbanization of Dubai.
http://economix.blogs.nytimes.com/2009/12/01/the-ascent-and-fall-of-dubai/

This is not the end of the road for Dubai
Sultan Sooud Al Qassemi, Financial Times, November 30, 2009
Other countries have gone through the same cycle and emerged in a better condition. Dubai now has a chance to emerge leaner, meaner and better, writes Sultan Sooud Al Qassemi.
http://www.ft.com/cms/s/0/86584d48-dde6-11de-b8e2-00144feabdc0.html?nclick_check=1

What the Dubai Crisis Means for Emerging Markets
David Bogoslaw, BusinessWeek, November 30, 2009
Analysts say the emirate's debt crisis likely won't impact the reputation of true emerging markets, whose credit ratings are mostly improving.
http://www.businessweek.com/investor/content/nov2009/pi20091130_502719.htm

snuffysmith

at 08:33 on December 1st, 2009

Dubai Crisis Tests Laws of Islamic Financing

http://www.nytimes.com/2009/12/01/business/global/01islamic.html?_r=1&hp

snuffysmith

at 12:57 on December 1st, 2009

From:

Financial Investment by Unbelievers in Bonds Around the Islamic RealmDubai FUBAR

"Time to pay the piper.

The Dubai World and Nakheel Sukuk is by far worse than any garden variety western junk bond. The purpose of this bond was to raise money for some of the most gaudy not to say laughable and absurd projects imaginable. Everyone of these projects started as a "vision" or dream in the mind of its megalomaniac uneducated ruler (Apparently he never finished school). Some projects are now halted in mid construction because there is no fresh money coming in and payments to contractors, workers and suppliers have been halted long ago. The Sukuk repayment to investors has been unilaterally postponed for six months. In fact all Dubai bonds have been suspended from trading before the markets opened Monday 11/30/09. There was no warning. There was no consultation. There is no precedent for this action. The bond is secured by partial ownership in a circus (well, actually Cirque de Soleil which is quite respectable as a public spectacle), an old passenger ship ( actually the respectable but useless nevertheless QE2) and a long long row of dry as a bone shimmering in the heat bunch of shifting sand dunes (well, actually some of them are on the waterfront, with trash, oil waste and fecal material gently lapping on the beach). This stuff secures about 4 billion. Sort of.

Actually there is no legal recourse to collect by investors. The islamic underlying rule for a Sukuk bond is that investors are partners and therefore must accept the losses since there is no guarantee of profit. Unbelievable as it may sound to western ears, a promise to pay back capital is against islamic rules. Yup, the unbelievers have been left in utter disbelief."

snuffysmith

at 09:17 on December 1st, 2009

Fear of creditor wipe-out as Dubai jettisons conglomerate

Dubai World, the state-owned conglomerate, was effectively abandoned to its fate by the Emirate's Government yesterday despite previous assumptions that Dubai would stand behind the company. That has raised the likelihood that lenders to Dubai World, which has liabilities of $60 billion, could lose billions of dollars.

Dubai World will be restructured and some of its assets ... are likely to be sold to pay down debt.

However, there is uncertainty over the robustness of creditor protection under Dubai law and lenders are understood to be concerned that they will get little or none of their money back.

Analysts at RBC Capital Markets said: “The bottom line is that creditors have almost no legal legs to stand on to maximise recovery values.”

snuffysmith

at 09:39 on December 1st, 2009

Dubai: Just the First Sovereign Domino to Fallfrom SeekingAlpha.com: Home Page by Graham Summers

Last week, Dubai World (a largely state-owned entity with holdings in various Dubai companies) announced it required a six-month extension on a $60 billion loan.

The United Arab Emirate central bank (essentially the oil-richer than Dubai Abu Dhabi) stepped forward promising to provide the needed liquidity and back the debts. However, the markets viewed these developments as a matter of sovereign default with equities and commodities (including Gold) plunging as investors flew to short-term Treasuries and the Dollar.

Complete Story

snuffysmith

at 09:57 on December 1st, 2009

Marc Faber: Dubai Was Just The Tip of The Sovereign Default Icebergfrom Clusterstock by Vincent Fernando

Marc Faber warns that further sovereign defaults are ahead. Dubai was just a teaser.

Starting from 0:45 in the video:

Dubai was just the tip of the iceberg. The ultimate result of the financial crisis will be not just bankrupt banks, but more bankrupt governments.
Massive U.S. economic stimulus means that U.S. bonds will one day have to offer higher yield than corporate bonds due to default risk.
China has learned one thing from the U.S. -- how to massage and doctor economic statistics.

snuffysmith

at 10:01 on December 1st, 2009

The United States Of Wussesfrom Clusterstock by Henry Blodget

snuffysmith

at 13:12 on December 1st, 2009

John Feffer: Dubai on the Auction Block?Here's the premise: an entire region is up for auction. "Mark your calendars for an opportunity of a lifetime," reads the ad copy. "In a bold step towards the future of global real estate, Nayruz invites you to bid for the ultimate luxury: the Middle East."

snuffysmith

at 08:43 on December 3rd, 2009

Doctor Doom Lessons From Dubai World Nouriel Roubini, 12.03.09, 12:01 AM EST Don't assume government backing for state-owned businesses.

snuffysmith

at 14:42 on December 4th, 2009

A bad omen in Dubai
By Sebastian Mallaby Friday, December 4, 2009

Mallaby writes:

"No other country built a ski resort in a desert. No other country constructed an archipelago of 300 artificial islands, complete with a man-made reef colonized by parrot fish. But even if Dubai is a gaudy outlier -- a sort of Donald Trump of a nation -- the bankruptcy of its flagship investment company, Dubai World, holds a warning for others. The nonchalance with which global financial markets have reacted is not reassuring in the least. The lack of alarm is alarming."

smallaby@cfr.org

snuffysmith

at 14:44 on December 4th, 2009

Bernanke May Get Second Term at Fed Shorn of Bank Supervision (Bloomberg)

snuffysmith

at 20:06 on December 5th, 2009

Michael Pento: Dubai is Not Alonefrom The Huffington Post by Michael Pento

snuffysmith

at 20:08 on December 5th, 2009

Dubai is Not Alone

snuffysmith

at 08:21 on December 6th, 2009

From The Times: Banks face fresh Dubai debt fears

FEARS are growing among western banks that Dubai Holding, the personal investment vehicle of the emirate’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, will be the next state-owned Dubai company to default.

The conglomerate went on a debt-fuelled spending spree in the past decade, borrowing $12 billion (£7.3 billion) to fund ambitious projects ...

Together, Dubai World and Dubai Holding are thought to account for 60% to 70% of Dubai’s total debt. Research from Bank of America Merrill Lynch indicates that Dubai Holding has $1.8 billion due for repayment next year.

Just more potential losses for the Royal Bank of Scotland and HSBC.

snuffysmith

at 06:53 on December 7th, 2009

Government official: Dubai World may sell assets (AP)

snuffysmith

at 02:32 on December 10th, 2009

America's Largest Bond Investor Jumps Into The Dubai Carnage Proof markets are panic-sold.

Read »

snuffysmith

at 06:37 on December 10th, 2009

Dubai Newspaper Slams Creditors' "Temper Tantrum", Compares Them To Dick Fuld

There's some nasty words in today's edition of the english UAE newspaper, The National, for Dubai's creditors:

The National (via FT Alphaville): Dubai World’s creditors responded with a temper tantrum in the international media. To read the coverage of Dubai’s announcement, one might think Dubai and the companies it controls are ready to miss payment on their entire $85bn in estimated debts.