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Wednesday, 27 January 2010

Dubai’s Emirates NBD Discontinues Use of S&P Ratings

Emirates NBD PJSC, the United Arab Emirates’ biggest bank by assets, dropped Standard & Poor’s Investors Service as a rating company.

Emirates NBD will utilize the services of Fitch Ratings, Moody’s and Capital Intelligence, it said in an e-mailed statement today.

Dubai Holding Commercial Operations Group LLC, the investment company owned by Dubai’s ruler, on Jan. 25 dropped S&P as its rating company because of a “lack of understanding of the business, its operations and relationship with the Government of Dubai.”

Abu Dhabi National Energy Co. ended its relationship with S&P last year after the state-controlled power producer’s long- term credit rating was put on negative watch.END

Kuwait, Qatar Shares Drop for Second Day; Dubai’s Index Rises

Kuwaiti and Qatari shares declined for a second day as oil traded below $75 a barrel and on concern that China and the U.S. will accelerate plans to unwind stimulus measures. Dubai’s benchmark index gained.

Zain, Kuwait’s biggest phone company, fell to the lowest since May. Masraf Al Rayan, Qatar’s fourth-largest bank by market value, dropped for a second day after reporting a lower profit on Jan. 26. The Kuwait Stocks Exchange Index lost 1.3 percent, the most in more than three weeks, to 6,975.1. Qatar’s Doha Securities Market 20 Index declined 1.1 percent to the lowest level in six months.

In Europe, the Dow Jones Stoxx 600 Index has fallen 2.3 percent this year as the U.S. called for limits on risk-taking by banks and China moved to restrict lending and cool economic growth. U.S. stocks fell in the final hour of trading yesterday as investors speculated that the Federal Reserve may signal more plans to unwind stimulus measures. Oil traded below $75 a barrel before a report forecast to show U.S. crude inventories rose.

Kuwait, Dow in unofficial settlement talks-paper

Kuwait is in unofficial talks with Dow Chemical Co (DOW.N) to avoid paying a $2.5 billion penalty for scrapping a $17.4 billion petrochemical deal, a Kuwaiti newspaper said.

"There are friendly unofficial negotiations with Dow Chemical to settle the $2.5 billion penalty before reaching arbitration," daily newspaper al-Rai said on Wednesday, citing oil sources.

Kuwait has offered to pay about $250 million, or 10 percent of the penalty, the paper said.

The world's fourth-largest oil exporter scrapped the petrochemicals deal with Dow in December 2008, a month after signing it, due to criticism in parliament.END

Oman says uncovers US$220 mln investment fraud

Thousands of investors have been swindled out of a total of 88 million rials (US$220 million), Oman's prosecutor's office said on Wednesday, in what one analyst said could be the Gulf Arab countries biggest securities portfolio fraud.

"So far, as many as 3,254 people fell prey to the swindlers and the total amount swindled by the cheats so far stands at 88.4 million rials," the public prosecutor's office said in a statement.

The statement said five of seven people suspected of involvement in the securities portfolio fraud were in custody while two were still at large. It did not name the suspects.

National Bank Oman hires Dubai Bank chief as CEO

National Bank of Oman NBO.OM(NBO) said on Wednesday it named Salam Al Shaksy of Dubai Bank as its new chief executive, as the sultanate's third-largest lender seeks to bolster its international profile.

Al Shaksy will replace Murray Sims, whose contract expired, at the helm of NBO, the bank said in statement.

No replacement for Al Shaksy at Dubai Bank has been announced. Dubai Bank was not available to comment.

Head of Bahrain bank detained for embezzling 2 billion dollars

The chief executive of The International Banking Corp (TIBC) has been detained by Bahrain authorities on allegations of embezzling more than 2 billion US dollars, a news report said Wednesday. The public prosecutor ordered the detention of the executive, who may not be named according to Bahraini law, after he was charged with breach of trust and theft following two days of interrogation, the Arabic-language daily al-Bilad said.

In July, the Central Bank of Bahrain assumed control of Manama-based TIBC, which is owned by the Saudi-based Algosaibi Group. TIBC, which was engaged in Islamic banking and provided commercial loans, reportedly owes 2.07 billion US dollars.

The Algosaibi Group announced in mid-2009 that it had discovered substantial irregularities at its financial services arm as well as widespread fraud in documents submitted to banks by TIBC.

Investigations revealed that some signatures attributed to Suliman Hamad Algosaibi, chairman of TIBC's parent company, were forged and had been computer-generated, al-Bilad's report said.

Investcorp swings to H1 net profit on hedge funds

Bahrain- and London-listed Investcorp INVB.BH (INVBq.L) swung to a first-half net profit as its hedge fund business recovered from the financial crisis.

On Wednesday, the investment house said net profit in the six months ended Dec 31. was $60.2 million, after a $511 million net loss a year ago.

It said its hedge fund business posted income of $96.6 million in the first half versus a loss of $398.1 million.

Buy Oil Stocks… No Matter What

We really don't know as much about the oil market as we think we do.

There are many numbers out there, but most of these involve a lot of guesswork. For example, we really don't know just how much oil the world will need. The US Department of Energy says we'll need 106.6 million barrels a day by 2030, but how does it know? It can't know. The DOE can't know what the world will look like in 2030.

We don't really know how much oil we're discovering or how much will actually come to the market any time soon. We don't really know how much it will cost to get this oil.

Amlak, Tamweel Merger Gets Cash Allocation, Al Itihad Says

The Dubai ministerial committee in charge of reviewing and developing strategies for Amlak Finance PJSC and Tamweel PJSC allocated 2 billion dirhams ($545 million) to the country’s mortgage lenders once they have merged, Al Itihad reported, citing an unidentified person familiar with the matter.

The United Arab Emirates, of which Dubai is a member, will provide half the amount and Dubai’s government the other half, according to the committee’s ruling, the newspaper said.

The formal merger proceedings won’t start until both companies have accepted the terms, Al Itihad said.END

Wall St. WTF: Cloak and Dagger, Smoke and Mirrors

As you might imagine there are a lot of conspiracy theories floating around about the Dubai crisis. I want to talk about two in this post one implausible the other completely plausible.

The first theory that has been posted both as a comment and as an email to me is about the Abu Dhabi refusal to back Nakheel and the subsequent debt standstill by Dubai at the end of November. This touched off a global panic for a few days that was not as obvious in the US on account of the Thanksgiving holiday. More immediately it touched off a panic in the Nakheel Sukuk market. The bonds traded down to $0.44 on the dollar, slowly drifted back up to around $0.65. Then in late December Abu Dhabi rode to the rescue and paid off in full.

The theory is that the Abu Dhabi and Dubai planned the whole thing so that they could knock down the price of the bonds and then buy them back more cheaply and then pay them off and avoid default. I think there is zero chance that this is what happened. For one thing, if they were really serious about that then they could have used much harsher rhetoric and threatened an actual default rather than requesting a standstill agreement and that would have driven the bonds much lower. Also if they were so interested in buying back as many bonds as they could get their hands on why did they halt trading on the DIFX? All they did was force the trading to go on in London where, as it turned out, it was easy for hedge funds to get at them. Additionally the increased borrowing costs for all the other Dubai entities that have resulted from the Abu Dhabi bail-out two step are sure to dwarf whatever could have been saved with this clever sleight of hand. No, I don’t think that’s what happened.

No I think what happened was more along the lines of the official narrative. Abu Dhabi got skittish about rescuing the more farfetched of the Dubai property ventures and drew a ring around the things it would save. Nakheel was outside that ring. Abu Dhabi miscalculated however because the very next Nakheel Sukuk to come due had a clause which enabled the bondholders to go after the international assets of Dubai World in event of default. This would have involved massive public humiliation for all involved and so Abu Dhabi paid off.

The other conspiracy theory that has been both posted as a comment and emailed to me, anonymously in both cases but I did some sleuthing and I think the person might actually be connected to one of the parties involved. It has to do with my favourite topic: the Damas heist.

I wrote in an earlier blog post about a curious “unauthorized transaction” in which Damas lent $80 million to a private equity vehicle by the name of Dubai Ventures. Dubai ventures never paid interest on the loan which then accrued to something like $84 million at which point the loan was converted to equity. When the PWC forensic accountants going through the “unauthorized transactions” came upon this vehicle they inquired as to what was in the holding company and were told that what was in the fund were $20 million shares of Damas itself. This is really a mystery and in my original article I theorized that someone must have made off with the missing $64 million, perhaps to buy yachts or Ferraris with it.

Readers of this blog have posited a different and to their eyes a more benign theory. Their theory is that when the book building process was underway for Damas during it’s IPO there was not enough interest to make the offer a success. The Abdullah brothers who control Damas made a call to someone friendly at Dubai Holding who agreed that its private equity subsidiary Dubai Ventures would make a substantial subscription to the IPO on condition that Damas make Dubai Ventures whole. The “loan” and its conversion to equity were Damas keeping up their end of the bargain. The fact that a mere $20 million worth of shares remain in the vehicle is accounted for by the fact that Damas shares have declined substantially since the IPO, not because the funds were stolen outright.

This theory has the ring of truth to me. In the summer of 2008, as the global financial crisis gathered steam it was important for Dubai to not have a failed IPO in the DIFC. The Abdullah brothers were connected and well known and for their IPO to fail would have been particularly difficult. The powers that be probably thought that Dubai Ventures would be able to sell the shares in the aftermarket for a small profit and no one would be the wiser. Unfortunately Damas shares began to sink almost immediately and so there was never a chance for Dubai Ventures to get out but not to worry because the Abdullah brothers made them whole with the money of the other Damas shareholders. Ultimately they rode the shares all the way down until they got their call from PWC.

So what do you think? Was this not a fraud but rather an honest attempt to avoid embarrassment for the brothers Abdullah and more generally the DIFC and Dubai? Their hearts were pure when they put the transaction together but things did not work out as planned and as a result the shareholders are out $60 million? Not to worry though the Abdullah brothers plan to sell a yacht or two and pay it all back. No harm, no foul?

You know my answer to this. The issue is not whether their intentions were noble or not, what matters is whether or not they broke the law. Is there a law against this sort of thing in the DIFC? There sure as hell is. This plan was meant to conceal from the other investors that there was not enough interest in the IPO to justify the price being paid by the non-Dubai Ventures Shareholders. This scheme, if it took place, violated the DIFC Markets Law in several ways. Specifically The DIFC Markets Law, Part 8: Prevention of Market Misconduct, Chapter 1: Market Misconduct: Section 36(a): “contributing a misleading appearance of trading in or price for a security,” Section 38: “engaging in conduct relating to investments that is misleading” and Section 41: “a person in the DIFC shall not induce a person to deal by concealing material facts.”

So what is being done about this? Nothing. The DFSA is monitoring the situation but not conducting its own inquiry. The big international shareholders in Damas are emerging market mutual funds who claim to their investors that they have market knowledge in frontier markets so they will not bring a case because it would undermine their claims to know what they are doing. The inaction of the DIFC and the DFSA is not costless to Dubai. By undermining the integrity of the DIFC, the venue not only for this $80 million fraud but for the $80 billion restructuring of Dubai Inc. Their inaction puts Dubai as a whole at risk in order to spare the Abdullah Brothers and Dubai Holding some embarrassment. / Middle East / Economy - IMF revises UAE projections

The International Monetary Fund has revised downwards its economic projections for the United Arab Emirates, forecasting flat growth this year as Dubai’s moribund real estate market and debt restructuring drag on continuing growth in the oil-rich capital of Abu Dhabi.

In the IMF’s last regional outlook report published in October, it had predicted 2.4 per cent growth for the economy in 2010, before Dubai sent global markets tumbling in November when it said it would seek to delay $26bn of debts at state-owned conglomerate Dubai World, dragging down the emirate’s reputation and eventually prompting a bailout from neighbouring Abu Dhabi.

“We expect flat growth – as the result of continual drag and a contraction in Dubai from the property crisis and positive growth in Abu Dhabi,” said Masood Ahmed, the IMF’s director for the Middle East.

Dubai looks to Qatar for natural gas

Dubai may start importing up to 37 billion cubic feet per year of natural gas from Qatar as early as September.

Qatargas 4, a liquefied natural gas (LNG) joint venture between Qatar Petroleum and Royal Dutch Shell, has decided to ship half the plant’s planned output to China and Dubai instead of North America, Gerrit-Jan Smitskamp, Shell’s regional vice president for finance, said yesterday in Doha.

About 40 per cent of the LNG from the project would go to China, and about 10 per cent to Dubai, where market conditions for gas exporters are more favourable than in the US and Canada.

Bank battens down hatches in a storm

Being a bank in the UAE lately has been about as easy as staying adrift in a leaky boat during a nasty storm.

Property loan books have felt the brunt of price declines in Dubai, estimated at up to 50 per cent in some places. Corporate lending has not provided much shelter, either, due to defaults last year at several large regional firms. If banks thought retail loans might rescue them, they were wrong. Defaults on everything from credit cards to mortgages rose last year, bankers say.

As if that is not enough, they are also coping with competition for deposits that has made bringing in new money more costly. That, in turn, has pushed some lenders to increase rates on loans and revise how they calculate interest on variable-rate mortgages, a move that has caused considerable tension with customers.

The Gulf: After the credit shock, a year of stabilisation is in prospect

The Gulf is starting to recover from its worst year since the late 1990s – the last time oil prices collapsed and the region experienced a sharp downturn.

After initial, misplaced optimism that the region would be protected from the credit crunch, the downturn hit all six Arab Gulf states far harder than had been expected, as oil prices declined and credit vanished.

After a five-year petrodollar boom that shaped the world’s perception of the Gulf as a cast-iron investment destination, the region came crashing to a halt. Nominal GDP fell by a fifth.

Will Dubai Be a Drag on Gulf Region?

With a dazzling display of fireworks that lit the night sky for miles around, Dubai officially added “world’s tallest building” this month to its trophy case of superlatives.

The inauguration was intended to send a bravura message: Dubai, after a brush with default last year, was back. But for many investors, the silvery steel needle that soars half a mile into the sky will remain a fitting symbol of the hubris that led to the wealthy city-state’s burst property bubble.

Will the tarnish in Dubai spread to other oil-rich Gulf economies?