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Thursday, 3 December 2009

Inside Futures: Relevant trading-focused information authored by key players in the futures, options and forex industries

Inside Futures: Relevant trading-focused information authored by key players in the futures, options and forex industries

S&P downgrades Dubai banks

Standard & Poor’s, the rating agency, downgraded a clutch of major Dubai banks on Thursday due to their exposure to a troubled state-owned conglomerate, and warned further demotions could come soon.

The decision by Dubai World, a flagship government holding company of developers, ports operators and investment companies, to restructure $26bn of its debts has shocked financial markets and rattled regional and international financial institutions, which had expected government support.

While concerns over international banks such as HSBC, Standard Chartered and Royal Bank of Scotland – all major lenders in the United Arab Emirates – are easing, bankers remain worried that the restructuring could lead to painful losses at smaller, more heavily exposed local banks.

Dubai Selloff Eases as Latvia, Senegal Plan Bonds, Yields Fall

In a sign the global selloff caused by Dubai’s debt crisis is over, Latvia, the European Union country worst hit by the worldwide recession, and sub-Saharan Senegal began pitching their first sales of bonds in dollars as emerging markets recovered.

Latvia hired Citigroup Inc. and Credit Suisse Group AG to gather bondholders in Europe and the U.S. this week and next, three investors approached for the offering said yesterday. Senegal, rated four levels below investment grade by Standard & Poor’s, organized meetings via Citigroup starting Dec. 7, a banker involved said.

The offerings underscore a rebound in developing-nation markets in the week after Dubai said Nov. 25 it would seek to delay debt payments from state-controlled Dubai World, with more than $59 billion of obligations, according to Atlanta-based Invesco. Emerging-market bonds lost 0.8 percent after the announcement, the steepest decline since April, on concern the emirate was poised to default.

Doha Shares Reach Week High as Barwa Expects No Dubai ‘Impact’

Doha shares rose to their highest in more than a week after Barwa Real Estate Co. said it’s not affected by Dubai World’s debt difficulties, boosting speculation the emirate’s woes won’t spill over into Qatar.

Barwa, Qatar’s second-largest property developer, and Qatar Gas Transport led the DSM 20 Index 1.2 percent higher to 7,033.52 at the close in the Persian Gulf emirate. The gauge’s 6.6 percent gain in the past two days still leaves it 2.3 percent down from its close on Nov. 25, when Dubai World roiled markets by saying it planned to delay debt payments.

“There is increasing realization that Dubai World is a contained event,” said Ali Khan, head of cash-equity trading at Dubai-based Arqaam Capital Ltd. “Also, Qatar has been focusing on its own domestic developments, thus limiting its exposure to Dubai.”

The Gulf Curve: GCC Credit Thoughts – December 3, 2009

The Gulf Curve: GCC Credit Thoughts – December 3, 2009

A U.S. Parallel to Dubai World

Fannie Mae and Freddie Mac are not exactly America’s answer to Dubai World. But creditors of the two mortgage finance giants should not forget that, like Dubai’s investment arm, they have only implicit government backing.

So far, investors are sleeping just fine at night. The Treasury’s $400 billion equity line for the two companies has a lot to do with that, as does federal ownership of more than $1 trillion of Fannie and Freddie debt and mortgage-backed securities. The government would be shooting itself in the foot if it were to allow them to default on their more than $1.6 trillion of outstanding debt.

On top of that, the role of the two government-sponsored enterprises in the nation’s housing finance market is pivotal. Even setting aside domestic concerns, a default by the two on what has long been seen as quasi-sovereign debt would torpedo America’s reputation in international financial markets.

Dubai World will pay debts, given time-UAE minister

It is only a matter of time before Dubai's troubled conglomerate Dubai World [DBWLD.UL] restructures its debt and meets its obligations, the United Arab Emirates economy minister said.

Sultan bin Saeed al-Mansouri, in remarks carried by the official WAM news agency late on Wednesday, also attacked "this negative campaign" against the UAE and Dubai, a member of the seven-emirate Gulf Arab federation.

"Dubai is an integral part of the United Arab Emirates, the second largest Arab economy," WAM quoted the minister as saying.

Gulf credit risk under scrutiny after the storm

For other Gulf nations, the most important factor with Dubai’s debt restructuring is how it will affect their ability to borrow from international financial markets.

Sovereign risk assessment is back with a vengeance and it is no longer enough to borrow as though the funding was endless and on easy terms.

The immediate reaction of the rest of the world to the Dubai restructuring was predictable – higher rates for credit default swaps (CDS), the abandonment of some global bond launches such as Gulf International Bank’s dollar bond, and a general reassessment of Gulf credit risk.

Nasdaq:No Risk Of Dubai Stake Sale, Eyes Baltic Facility

Nasdaq OMX Group Inc. (NDAQ) doesn't expect that Borse Dubai Ltd. will be pressured to sell its stake in the exchange operator as some market participants have feared in recent days, the president of Nasdaq OMX Nordic told Dow Jones Newswires Wednesday.

"It's not a factor," Hans-Ole Jochumsen said in an interview on the sidelines of an industry conference in Brussels.

Jochumsen said Nasdaq OMX's share price had rebounded in recent days following a sell-off prompted by fears that Borse Dubai would sell its 28% stake in Nasdaq OMX, as the emirate of Dubai seeks a stay on Dubai World's debt obligations.

Borse Dubai became the biggest shareholder in Nasdaq OMX following Nasdaq's acquisition of Nordic exchange group OMX in early 2008. That deal saw Borse Dubai buy into OMX ahead of Nasdaq's planned purchase, eventually acquiring OMX outright and selling it to Nasdaq OMX in return for a 28% stake in the combined exchange company.

Dubai roiled global markets last week when the formerly high-flying emirate announced that its main development company, Dubai World, needed a six-month standstill on paying back $60 billion in debt, while it restructures its Nakheel World and Limitless World units.

Borse Dubai, created in 2007 to consolidate the emirate's interest in its nascent financial exchange business, is separate from Dubai World.

Borse Dubai holds 20% of Nasdaq OMX shares directly, with an additional 8% held in a blind trust; it also owns 20% of the London Stock Exchange, shares, which also came under pressure following the Dubai World announcement.

Though there is no direct link between the troubled Dubai World and Borse Dubai, Citi Investment Research analyst Donald Fandetti said the emirate's struggles have raised questions around all of its liquid investments.

"When Dubai made these investments, part of it was to diversify, and the other part was to become a more prominent financial hub," Fandetti said. "You wonder what this crisis does to that aspiration...good assets can be sold when there are capital calls."

Jochumsen also said Nasdaq OMX hoped to launch a multilateral trading facility in the Baltic region, where it last month boosted its stakeholdings in several exchanges with the aim of introducing a single trading currency across the markets.

By introducing a single trading currency on exchanges in Estonia, Latvia and Lithuania, Nasdaq OMX hopes to avoid risks related to currency fluctuation and create a bigger liquidity pool, Jochumsen said. "Our intention is to make sure that there is a well-functioning market" in the region, he said.

In the U.K., Nasdaq OMX plans to introduce power derivatives trading on its nascent N2EX market around the end of the first quarter or the second quarter of 2010, after introducing spot trading on Jan. 11.

"The first step is to create a physical market," Jochumsen said. "In three to five years we should have a very interesting perspective" for the segment.END

Citigroup Sells Debt as Part of Abu Dhabi Investment

Citigroup Inc. sold $1.875 billion of five-year senior debt as part of terms for a cash injection from Abu Dhabi Investment Authority in 2007, according to data compiled by Bloomberg.

The 6.01 percent notes priced to yield 350 basis points more than similar-maturity U.S. Treasuries, Bloomberg data show. A person familiar with the transaction earlier said the debt might pay a spread of about 325 basis points. A basis point is 0.01 percentage point.

Abu Dhabi Investment received equity units in New York- based Citigroup in exchange for $7.5 billion in cash. The units, which included junior-ranking debt securities, require Citigroup to remarket the subordinated securities and use the proceeds to buy Citigroup common stock in four equal installments starting next March, according to a November 2007 statement from the bank.

As Crisis in Dubai Unfolds, Quick Answers Are Unlikely

What’s the difference between Dubai and Dubai World?

Dubai’s spectacular rise from a village of pearl fishermen 50 years ago to a commercial and financial hub of the Persian Gulf today was built on the idea that the state and its economic interests were inseparable.

So, when a senior government official said this week that the government would not back the debt of Dubai World, Dubai’s wholly owned investment vehicle, investors and creditors were stunned.

Qatar rises above Gulf crisis with high hopes for UK property market

The British property market remains an attractive investment to Qatar, the Governor of the Qatar Central Bank (QCB) said yesterday, as he gave the seal of approval to the Gulf state’s latest UK project.

Troubles in Dubai, high-profile court cases in London and the fallout from the credit crunch will have no impact on the construction of the £2 billion Shard, on the South Bank of the Thames near London Bridge, which has already reached the fifth of its 80 floors. When completed, it will be Europe’s tallest building.

“The State of Qatar is firmly behind this project, which reflects our belief that the UK property market continues to offer us an attractive and stable economic environment in which to invest,” Sheikh Abdullah bin Saud al-Thani, Governor of the QCB, said.

S&P acts again on Dubai

Inevitable, but eye-catching all the same. S&P has just downgraded all six of the Dubai government related entities, namely:



Moody’s downgraded the six Dubai GREs last week, but the S&P move looks much more severe and follows the stark declaration from the Dubai finance ministry, which the rating agency has read as saying that anyone lending to the GREs should only do so on their stand-alone credit quality.

The promise of timely government support should not be relied upon - as every investor in Dubai now knows. And it goes without saying that these latest S&P ratings remain on credit watch, with negative implications.

One interesting side-note — S&P classifies a “standstill” as a default:

…under Standard & Poor’s default criteria (see “Rating Implications of Exchange Offers and Similar Restructurings” below), a standstill is considered a default. Standard & Poor’s is of the opinion that, as evidenced in the case of Dubai World and Nakheel, the Dubai government is either unable or unwilling, or both, to provide extraordinary government support in the form of timely and sufficient financial support to those of its GREs that provide essential government services on its behalf.

Sukuk restructuring crunch-point looms

The open desert near Dubai’s Jebel Ali industrial area was supposed to be the site of Nakheel’s grandest vision – the Dubai Waterfront.

Here, the property developer wanted to build a city twice the size of the Hong Kong island, with skyscrapers for 1.5m residents, all ringed by a 75km canal.

But Dubai and Nakheel’s financial crisis has stalled the project, perhaps permanently, making it another multi-billion dollar casualty of the emirate’s crisis.

Fears grow for Dubai state-related groups


With Dubai World cut adrift from implicit government support, there are concerns about potential defaults by other state-related entities. The name mentioned most by bankers and investors in the region is that of Dubai Holding, the personal investment vehicle of the ruler, Sheikh Mohammed bin Rashid al-Maktoum.

“Dubai’s actions have introduced the risk that restructuring of other corporates could follow,” Barclays Capital said in a report this week. “We would focus on those with weak fundamentals and upcoming maturities and we view Dubai Holding as being most at risk.”

Dubai Holding’s Commercial Operations Group was downgraded by Moody’s, the rating agency, to two notches above junk last week. The cost of insuring $10m for five years against default ballooned to $1.1435m a year on Tuesday, making it the riskiest Dubai corporate bond according to the market.

Troubles play into Abu Dhabi's hands

Cars sit bumper to bumper along Abu Dhabi's clogged highways, decked out with the green, white, black and red flag of the United Arab Emirates. Young Emiratis toot their horns, lean out of their vehicles, wave yet more flags and cheer in celebration as fireworks explode in the background.

Their exuberant celebrations marked the UAE's national day yesterday - the 38th anniversary of the union that entwined seven emirates into one nation. But this year the festivities are occurring as the federal system faces unprecedented scrutiny and Dubai's debt travails have raised queries about its relationship with Abu Dhabi.

For many, the big question has been where is Abu Dhabi? Why has there been silence from the wealthy capital that many assumed would be on hand to support its neighbour? That was what many investors were banking on as they poured billions into Dubai. In the capital, however, observers say this miscalculation showed a lack of understanding of the federation, particularly the relationship between Abu Dhabi and Dubai, the most powerful and competitive of the emirates.