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Thursday, 5 November 2009

TIMELINE-Defaults: Islamic finance in uncharted territory

A sukuk default by Kuwait's Investment Dar and debt restructuring at Saudi conglomerates have shaken confidence in the $1 trillion Islamic finance industry, fanning debate about investors' protection and investors' rights.

Billed as safer than traditional banking due to requirements for assets to underpin deals, Islamic bond holders worry they may not have any more legal safeguards than conventional counterparts in case of default, or perhaps even less, partly due to the untested nature of the process.

Debt restructurings at Saudi conglomerates Saad Group [SAADG.UL] and Algosaibi have put about $9.6 billion of investments at risk at 30 Gulf banks alone, and the fate of Dubai government-owned property firm Nakheel's $3.5 billion Islamic bonds, which mature in December, is being closely

Bahrain central bank suspends real estate caps-sources

The Central Bank of Bahrain (CBB) has suspended caps on banks' exposures to the region's troubled real estate markets, banking sources said, highlighting regulators' trouble with containing the crisis aftermath.

"There was a regulation that was issued on the first of August and then on the 18th of August it was withdrawn and suspended completely until further notice," a senior banker at a Bahraini retail bank told Reuters.

Banks in the Gulf Arab region invested heavily in regional property markets during a six-year oil boom, but the bursting of the real estate bubble in the region's tourism and commercial hub Dubai in 2008 raised concerns about their exposure.

Barclays Favors Dubai Bonds as Refinancing Risk Eases

Investors should buy Dubai sovereign bonds as the emirate seeks to refinance its maturing debt with the help of oil-rich Abu Dhabi and as the sheikhdom focuses on an “orderly exit from the crisis,” Barclays Capital said.

“We consider Dubai credit as attractively priced at current levels,” London-based analysts including Alia Moubayed wrote in a report dated Nov. 4. “We recommend a long position in Dubai sovereign credit,” and see yesterday’s negative price actions as an opportunity to buy, the report said.

The cost of protecting Dubai bonds from default rose 1.8 percent to 314 basis points yesterday, the highest in about two months, five-year credit-default swap prices show. Moody’s Investors Service yesterday downgraded five Dubai-owned firms, citing tighter government criteria for supporting state- controlled entities. CDS prices increase as perceptions of credit quality deteriorates.

Emirates Half-Year Net More Than Doubles on Cost Cuts

Emirates Airline, the biggest Arab carrier, said profit in the six months through September more than doubled as it cut costs and fuel expenses fell.

Net income increased to 752 million dirhams ($205 million) from 284 million dirhams a year earlier, Dubai government-owned Emirates said today in an e-mailed statement. Revenue fell 13.5 percent to 9.8 billion dirhams, reflecting lower passenger and cargo yields, the airline said.

“While some say the green shoots of economic recovery are sprouting, we expect it will take at least another year or two before demand for air transport and travel services starts picking up again,” Chairman and Chief Executive Officer Ahmed bin Saeed Al-Maktoum said in the statement.

Dubai Shares Fall on Moody’s Cuts, Oil Decline; Emaar Retreats

Dubai shares dropped for a third time this week, led by Emaar Properties PJSC and Dubai Islamic Bank PJSC, after Moody’s Investors Service downgraded five of the emirate’s state-run companies and as oil retreated.

Emaar, the United Arab Emirates’ biggest developer, fell 3.5 percent, erasing most of yesterday’s gain. Dubai Islamic Bank declined for the third time this week. The DFM General Index has fluctuated this week, alternating daily between falling and rising as much as 5.5 percent. The measure lost 1.9 percent to 2,097.63, bringing the drop for the week to 4.6 percent.

“There seems to be some nervousness around the Moody’s downgrade on some Dubai Inc. names,” Mark Friedenthal, fund manager at Abu Dhabi Commercial Bank, wrote in an e-mail. “It was anticipated but there is always some reaction, especially from retail investors, to this kind of headline.”

Damas Abdullah Brothers to Repay $165 Million Over 18 Months

Damas International Ltd., the Dubai based jeweler, and the Abdullah brothers reached a “formal commitment” to repay $165 million within 18 months after unauthorized transactions of that amount were conducted by the company’s former chief executive officer.

The Abdullah brothers have produced a list of assets available for liquidation, including real-estate, under the settlement agreement, according to a statement to Nasdaq Dubai today. The family also pledged 350 million of their shares in the company in the event of breaching the settlement.

They will repay $55 million within 6 months; an aggregate of $110 million within 12 months; and an aggregate of $165 million within 18 months, the statement said.END

Qatar to cut corporate tax to 10 per cent

Qatar plans to cut corporate tax to 10 per cent next year, Finance Minister Youssef Kamal said on Wednesday, as the Gulf state seeks to attract investors. The corporate tax rate is currently as much as 35 per cent.

"There is a tax bill about to be issued that would bring down the tax to 10 per cent. It would be implemented as of 2010," Kamal told a conference in remarks broadcast by Al Jazeera television.

Qatar, the world's biggest exporter of liquefied natural gas, has the world's friendliest tax climate, according to Forbes 2009 Tax Misery and Reform Index, which evaluates policies that attract or repel capital and talent.

Deyaar ex-CEO embezzled Dh6 million, says witness

The Dubai Court of Misdemeanour yesterday postponed to November 23 hearing in a trial involving nine accused of embezzlement at real estate company Deyaar.

The court heard the testimony of Mohammed Mustafa Hussein, expert at the Financial Audit Department of Dubai Ruler's Court, and who compiled a report on the case. Hussein said the first defendant, ZS (American) had embezzled $6 million (Dh22m) from Deyaar.

The expert said the request by Deyaar to buy, via one of its affiliated companies, a villa project in Turkey was signed and approved by the board chairman rather than the rest of the members. Neither was the project presented to the board, he said.

Gulf risks losing home advantage in Islamic finance

In London tomorrow, The Banker magazine is due to host a global gathering of Islamic financiers to unveil its top 500 Islamic financial institutions.

In Kuala Lumpur later this month, the central bank of Malaysia is planning a similar gathering, focusing on the emerging strength of that country as a Sharia-compliant centre.

A couple of conferences do not make for a straw in the wind, let along a tidal wave of sentiment, but I think they are illustrative of a growing trend in the Islamic finance industry that should alarm bankers in the Middle East: the region is no longer the natural global home of Islamic finance.

Under the radar: Saudi oil exports to U.S. fall to 22-year low (Re-post)

Under the radar: Some trends are obvious enough and visible to all investors. Others are more-subtle, but are just as potent, and these often slip 'under the radar.'

Case in point: Saudi Arabia's oil exports to the United States have fallen to a 22-year low, at 745,000 barrels per day (bpd) in August, the latest month for which data is available, from 1.14 million bpd in July, according to data compiled by the U.S. Energy Information Agency. August's 745,000 bpd total is the lowest since December 1987. On a year-over-year basis (August 2008-August 2009), those exports are down about 50%.

Further, Saudi Arabia now ranks fifth in oil exports to the U.S., behind: Canada, 2 million bpd; Mexico, 1.06 million bpd; Venezuela, 1.01 million bpd, and Nigeria, 877,000 bpd. Iraq is sixth, exporting 500,000 bpd to the U.S. Farther down the list is Russia, exporting 229,000 bpd to the U.S.

Brazil's Petrobras weighs Saudi Arabia investments

Brazilian energy giant Petrobras (PETR4.SA: Quote, Profile, Research)(PBR.N: Quote, Profile, Research) is weighing investment opportunities in Saudi Arabia after a visit to the country in October, Petrobras said in a regulatory filing on Wednesday.

Petrobras visited Petrochemical Jubail, where there are plans to build a fertilizer plant to produce ammonium nitrate and a green petroleum coke calcining (CVP) unit to supply the aluminum industry, the filing said.

State-controlled Petrobras is negotiating supplying CVP to the calcining plant as well as possibly participating in the two projects in association with the Modern Mining Holding Company Ltd. and its affiliate Modern Chemical Company Ltd. A December meeting has been scheduled to continue discussions, the filing added.

The hidden victims of recession

Salim*, a 28-year-old Bangladeshi worker in Dubai, lives on the cusp of disaster. One false move and the four-year veteran of the city will be arrested, detained and, if he’s lucky, deported home to his family. The father of two lost his passport when the construction company for which he was working went bust. All attempts to retrieve the documents failed.

Salim was then taken on illegally by a chemicals company. But as the recession started to bite late last year, the business struggled and farmed him out to building sites for casual work. When he refused these jobs because of the risk of being discovered by government labour inspectors, the foreman docked his wages. “We don’t go out much at night, in case we get caught by the police,” he says.

Salim lives with 80 other Indians, Nepalese and Bengalis in the down-at-heel Satwa neighbourhood, wedged in between the leafy villas of upmarket Jumeirah and the towers of Sheikh Zayed Road. He shares his room with a dozen other illegal workers, who hang their worldly possessions in plastic bags that adorn the walls like Christmas decorations. The bedrooms and cooking areas are overrun with cockroaches.

Dubai signals a rocky recovery

Investing in Dubai’s stock market has not been for the fainthearted over the past year.

Whiplash slumps and soaring rallies against the backdrop of a severe property crash and fears that the emirate might default have made for an unnerving experience.

Though its 30 per cent rally this year is rivalled only by the Saudi stock market in the region, the Dubai Financial Market remains 28 per cent down from 12 months ago – the second-worst performance in the Gulf after Bahrain’s tiny bourse – and has shed two-thirds of its value since its peak in January 2008.

“All the regional markets have been highly correlated to global movements ever since Lehman, but Dubai has suffered from a double whammy – its own real estate market drop and concerns over whether it could repay its debts,” says Hashem Montasser, head of asset management at EFG-Hermes, the investment bank

Moody’s downgrades Dubai companies

Moody’s on Wednesday downgraded five Dubai government-related issuers, citing the tighter conditions under which the government is likely to extend financial support.

The ratings agency downgraded from A3 to A1 DP World, the global ports operator; Dubai Water & Electricity Authority; and the investments arm of Dubai International Financial Centre; and from A3 to Baa1 Jebel Ali Free Zone; and the non-financial assets of Dubai Holding, the investment vehicle of the emirate’s ruler.

Listed real estate giant Emaar Properties, in which the government has a roughly one-third stake, maintained its Baa1 rating.

The downgrades come despite rising optimism that Dubai will be able to meet upcoming obligations on its $80bn debt mountain. Markets are betting that the government will help raise in December the $4.05bn needed to repay a sukuk, or Islamic bond, belonging to offshore developer Nakheel, which is guaranteed by its highly indebted government-owned parent, Dubai World.

Saudi Arabia set to reform commercial courts

After announcing a broad initiative of legal reform two years ago, Saudi Arabia now says it plans to establish new commercial courts in each of its 13 provinces next year as part of a $2.2bn drive.

An announcement last week that verdicts will be published on the justice ministry’s website suggests that the new courts will be more than window-dressing, and that an absence of sorely needed consistency has been recognised.

The Saudi capital markets authority has already begun publishing the names of insider trading and share manipulation offenders.

But, unlike other countries in the region, Saudi judges try to apply Islamic texts directly, rather than using them as a source of law. They specifically reject any system of precedent, as in common law systems, out of a fear that they may be “misled” by human wisdom. And no comprehensive civil code has been adopted, though such systems, often derived from French models, are common in the Arab world.

Investment banks breathe again

After a tumultuous year marked by property crashes, a dearth of petrodollars and international financial upheaval, investment banks operating in the Gulf are beginning to find work again.

Thawing debt markets have triggered a flurry of bond issues across the region; some sovereign wealth funds have continued to make overseas acquisitions in spite of losses on investments; and tottering companies have provided advisory teams with welcome restructuring work.

“The markets are beginning to bubble back now, and a lot of people are revisiting plans they shelved because of the crisis,” says Declan Hegarty, co-head of global banking at HSBC Middle East.

Fees remain low – and there is still not enough work to keep everyone occupied – but with the financial storm clouds clearing somewhat and signs of tentative economic recovery mounting, clear winners and losers in the region are emerging