Monday 20 May 2019

Dubai debt crisis rattles confidence in Persian Gulf borrowers

Laura Cochrane and Tal Barak Harif

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 Qatar to Saudi Arabia rose the most since June yesterday as Dubai World, with $59bn of liabilities, sought a “standstill” agreement from creditors.

Bonds of its property unit, Nakheel PJSC, mature December 14. Dubai contracts climbed 120 basis points to 438 basis points, the most since they started trading in January, 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 $2.5bn 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 $80bn 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.

Credit-default swaps across the region rose yesterday, with Saudi Arabia climbing 11.5 basis points to 86.5 and Qatar rising 5.5 basis points to 99, according to London-based CMA. Contracts linked to Abu Dhabi rose 34.5 basis points to 134.5.

The swap contracts 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 $10m of debt.

Dubai’s contracts, which increase as perceptions of credit quality deteriorate, are higher than Iceland’s. Credit-default swaps on DP World jumped by a record 163 basis points to 522, according to CMA data. The price of Nakheel’s bonds fell to 86 cents on the dollar from 110.5 the day before, according to Citigroup Inc. prices on Bloomberg.

Pressure on spreads

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 UAE that includes Abu Dhabi, which holds 8pc of the world’s oil reserves and bought $5bn of bonds sold by Dubai yesterday through state-controlled banks.

Unlike Argentina, which stopped payments on $95bn of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40pc, Dubai’s announcement yesterday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays.

The government raised $1.93bn last month in its first sale of Islamic bonds, attracting more than $6.3bn of orders.

The dollar-denominated securities due 2014, which are governed by Shariah laws barring investors from profiting from the exchange of money, yielded 6.33pc yesterday, down from 6.39pc when it was sold.

“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 UAE risk,” Moubayed wrote in a report yesterday.

Standstill agreement

Dubai World will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52bn of Islamic bonds due December 14 from Nakheel PJSC, Dubai’s Department of Finance said in an e-mailed statement yesterday.

Sheikh Mohammed removed the chairman of Dubai World last week. The company had $59.3bn in liabilities and $99.6bn in total assets at the end of 2008, subsidiary Nakheel Development, said in an August statement.

Dubai owes $4.3bn next month and $4.9bn in the first quarter of 2010 through government and corporate debt, Deutsche Bank AG data show.

Dubai World’s more than 70 creditors face the prospect of writedowns on as much as $60bn of debt if they haven’t unloaded their holdings and the state-owned company fails to win additional support from Abu Dhabi.


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