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Monday, 15 February 2010

U.A.E. Shares Drop for a 2nd Day on Losses, Debt Restructuring

United Arab Emirates shares declined for a second day after real-estate company Aldar Properties PJSC reported a loss and as investors hesitated to commit funds without clarity on Dubai’s debt restructuring. Saudi Arabia’s benchmark index rose.

Aldar, the Middle East’s second-largest developer by assets, fell to the lowest in almost seven months after reporting a fourth-quarter loss. Union Properties, a Dubai-based developer, retreated to the lowest level on record as it posted a full-year loss. Emaar Properties PJSC lost 1 percent. Abu Dhabi’s ADX General Index declined 0.6 percent to 2,710.73, bringing the two-day drop to 1.2 percent. Dubai’s DFM General Index lost 0.3 percent.

“Dubai World restructuring talks are now the biggest overhang in the market,” said Rabih Sultani, a fund manager at Duet Mena Ltd. in Dubai, a unit of Duet Group, which oversees $2.1 billion. “Most investors are still very hesitant to commit additional capital to Dubai without further news on the restructuring.”

Islamic finance yet to move out of crisis

The fledgling Islamic finance industry is still growing thanks to new markets and an inflow of oil money, but it is struggling to leave behind the legacy of the global financial crisis in the form of a real estate crash in the Gulf Arab region.

Islamic banking is one of the world's fastest growing financial sectors, according to industry estimates. It has attracted more attention in the aftermath of the global financial crisis as investors are increasingly looking for alternative, ethical ways of investing.

But in the Gulf Arab region, alongside South East Asia its most important regional centre, a funding crunch at Bahrain-based Islamic investment house Gulf Finance House shows that the industry still has a long way to go to diversify from real estate products and investments.

UAE to look at steps to reduce interbank rates

United Arab Emirates interbank offered rates do not reflect true market lending rates and the central bank will consult with banks and make proposals on how to reduce them, a central bank official said on Monday.

The Emirates Interbank Offered Rates (EIBOR) have been edging up in recent weeks, touching six-month highs as some banks pushed them higher in competition for deposits.

"It (EIBOR) does not reflect true market rates, so this is going to be discussed thoroughly at our next meeting with commercial banks," Saif Hadef al-Shamsi, senior executive director at the central bank's treasury department, told Reuters.

FT Alphaville » 60 cent

FT Alphaville » 60 cent

Fresh jitters in Dubai on Monday morning.




The cause? Reports in the Anglo Saxon press (where else?) that Dubai World, which is seeking a standstill deal with bank creditors over multibillion-dollar debt, might repay lenders just 60 cents in the dollar.

Saudi Arabia’s Debt Rating Raised to Aa3 by Moody’s

Saudi Arabia’s credit rating was raised by Moody’s Investors Service, which cited “strong” government finances that have withstood volatile oil prices and the global recession.

The kingdom’s foreign- and local-currency government debt ratings were raised one notch to Aa3, the fourth-highest grade, from A1 with a stable outlook, Moody’s said in a statement in Singapore today. It also increased the country’s ceiling for foreign-currency bank deposits to the same level.

“The upgrade was prompted by the continued strong state of government finances, which have largely withstood oil price volatility and the global economic crisis,” Moody’s said.

Bye Bye Africa

CNBC Arabia announced today that Zain Group’s board of directors has approved to sell their African operations to Bharti Airtel for USD10.7 billion (KD3,082 million). Bhari has been interested in the African operation for a while and there were previous negotiations last year for purchasing a stake in Zain Group. Vivendi SA, who came in July and offered USD12 billion for the African operations were the first to start off the Zain’s deal dilemma, but talks didn’t last for long (click here).

Bharti is Paying 65% Premium

Based on Zain Africa 9M09 financials, it shows that they have an EBITDA of USD870 million, which constitutes about 34% of the group’s EBITDA. Telecoms are trading at a mean EV/EBITDA multiple of 5.6x; if we imply that multiple to Zain Africa FY09E EBITDA (USD 1,156 million) it will result in a value of USD6,492 million. This means that Bharti are willing to pay approximately 65% premium.

In Need for Cash
Obviously this is a good deal for Zain as they didn’t keep their willingness to liquidate some assets secret. Although this forgoes their strategy of expanding outside the Middle East and capture growth opportunities, however they could use this excess cash to payback some debts or to finance other struggling operations, such as Zain Saudi. Personally I think that this cash will be given out as special dividends.
18% Upside Potential
Zain was suspended from trading today, but the whole market rallied on the back of this positive news. The sale will have a positive impact on Zain’s value. Looking at the table below, Zain African operations is valued at an EV/EBITDA multiple of 9.3x. If we value Zain ex-Africa by multiplying the average EV/EBITDA (5.6x) multiple to FY09E EBITDA (KD646 million) we will get an enterprise value of KD3,618 million; it will result in an EV of KD6,700 million for Zain Group (3,618+3,082). Doing the math (6,700-2121+330) we will reach a target market cap of KD4,909 and fair value per share of KD1.27, 18% upside from current prices.

DIC conjures up Merlin stake sale

Model deal: the owners of the Legoland attractions, like this one in Windsor have enlarged their holding in Merlin
Dubai International Capital has sold two-thirds of its 17 per cent stake in Merlin Entertainments, to the family behind Lego, which is a fellow investor in the theme park operator behind the London Eye and Legoland attractions.

The Dubai sovereign wealth fund agreed the sale with the Lego founding family – led by Kjeld Kirk Kristiansen, grandson of the founder – in the summer of 2009. This was shortly before Merlin started work on a £2bn ($3bn) initial public offering. But it has been kept secret since then to avoid speculation of a fire sale by Dubai, which has faced questions about its strategy since suffering a debt crisis late last year.

The proceeds of about £100m have been used by DIC to support other companies in its troubled European portfolio. These include Travelodge, the UK hotel chain;Mauser, the German packaging business; and Doncasters, the UK engineering group.

RAK seeks lift on coal deal

A huge coal-mining venture in Indonesia partly owned by the Ras al Khaimah Government is looking to Indian firms to bolster the project by financing a key railway and buying nearly all of the coal output, a top project executive says.

The integrated coal mine, railway and port in a sparsely populated corner of East Kalimantan, an Indonesia province on the island of Borneo, has been reorientated towards India after initially being described as a strategic investment by RAK to secure fuel for a proposed coal-fired power station in the emirate.

MEC Holdings, a 50-50 joint-venture between Trimex of India and the Ras al Khaimah Investment Authority, hopes to sign coal export agreements with two Indian power firms by the end of next month, said Madhu Koneru, the executive vice chairman of MEC.

Former TIBC chief produced films

The former chief executive of a Bahraini bank allegedly linked to a US$10 billion (Dh36.72bn) fraud in Saudi Arabia also produced independent American movies, The National has learnt.

Glenn Stewart, formerly the head of The International Banking Corporation (TIBC) in Bahrain, was credited as an executive producer of The Messenger, a 2009 film that was nominated for two Academy Awards in the US.

Mr Stewart was also among 14 executive producers of last year’s New York I Love You, a series of vignettes about New York City starring Natalie Portman, Ethan Hawke and Orlando Bloom.

Dubai World Creditors: batten down the hatches, the storm approaches (Re-post)

Zawya Dow Jones, the extremely capable MENA news bureau reported today on some rumoured details of the package that might be offered to the Dubai World creditors. The proposal, if true, would be an utter fiasco for the Dubai World creditors.

The details, unconfirmed, were that creditors would have their interest payments eliminated, the maturity extended by seven years and receive a 40% haircut meaning that they would recover only 60 cents for every dollar lent. This plan may come with an explicit Dubai government guarantee though I’m not sure what that is worth considering the credibility of the Dubai government. There was also a vague description of full recovery over a shorter time horizon though 40% of the recovery would be taken in equity in Nakheel. Given that the balance sheet of Nakheel includes undeveloped desert and non-existent islands in various shapes valued at billions of dollars this may well be economically the same thing as the $.60 on the dollar seven years out.

I think this will come as quite a shock to the markets. The Nakheel Sukuk that matures in May is currently trading at $0.65 on the dollar. If the creditors of the parent company, which owns desirable businesses and is thought to be in better shape in aggregate than Nakheel, are being offered $.60 on the dollar with zero interest the debts of Nakheel are trading much to richly. Dubai CDS have been bid up in recent days and from this it looks like they are set to go higher.

The most important reason however that this will shock the markets is what it says about the level of support that Dubai is getting from Abu Dhabi. After the full repayment of the ’09 Nahkheel Sukuk with the cash infusion from Abu Dhabi creditors felt as though they would all be rescued by intervention from the richer Emirate. Being asked to forgo all interest payments and take a 40% loss plus an extension out to 2017 is basically another repudiation of support for Dubai by Abu Dhabi. As a result the damage won’t stop at Dubai World but will be transmitted to Dubai Holding, ICD and DIFCI as investors gather that the support from Abu Dhabi is indeed limited.

So what happens next?

First there are the creditors of the parent company which are based in the UAE: the Abu Dhabi and Dubai based banks. I don’t think a lot needs to be said about this because they will accept whatever deal is on offer because they are effectively controlled by the governments which are making the offer. The central figures in the next act of this drama are the international banks who are creditors of Dubai World at the holding company level.

The international creditors are led by HSBC and RBS. The decision they have to make is whether the deal they are being offered is better or worse than declaring Dubai World in default. It’s hard to know what would happen in event of default. Ordinarily the equity holders would be wiped out and the debt holders would then own all the assets. In this case, given that the equity holder is the government of Dubai, that may not be possible. If Dubai denied their rights to the underlying assets of Dubai World then they would have to pursue their claims against the international assets of Dubai World. I’ve given a list of these assets in a previous entry.

There are also the actions of Dubai World and Abu Dhabi since the rescue in late December to consider. At the time Abu Dhabi announced a $10 billion contribution to the DFSF, which it later scaled back to $5 billion, or just a little more than was necessary to pay off the Sukuk holders. Dubai World has also put Istithmar holdings into slow motion liquidation, selling its stake in an Indian airline, putting Inchcape Holdings a shipping company up for sale and liquidating a private aviation company. DPW has solicited interest in someone buying some of their assets in Australia. Notice what these businesses have in common, they are assets located outside Dubai or are attachable physical assets which cannot generate revenue unless outside the UAE (ships and planes.) That is to say they are slowly off loading the assets the creditors would be able to pursue in the event of default.

More disturbingly a company formerly considered part of the Dubai World group, the Dubai Multi Commodities Center has declared its independence from the group on the basis that it was originally founded by an Emiri decree. It may well be that the company was founded by decree but it seems to have been largely funded and incubated by Dubai World with the funds of the creditors. For it to leave the group with no compensation being offered to the parent company is asset stripping so thinly veiled as to be haram.

The Dubai official quoted by Zawya said that the reason that no deal has yet been offered is that they wanted the international creditors to have enough time to properly analyse the business plan of Dubai World. It seems to me that the business plan is offloading the attachable international assets and stripping the productive domestic ones without compensation to the parent. Given that there has been no response from the creditors to the defection of DMCC it seems that there are no loan covenants barring divestiture. Thus this is a brilliant strategy on the part of Dubai World. The creditors at the parent company cannot put Dubai World into default until the loans come due in 2011. By that time Dubai World may have been able to sell all of its international assets and remove all the valuable UAE ones meaning that by the time the creditors began to sue Dubai World all the recoverable assets would be gone. That makes $0.60 on the dollar with a sovereign guarantee look pretty good.END

Bahrain to tighten banks' credit exposures

The Central Bank of Bahrain (CBB) launched a consultation process on Sunday with banks aimed at introducing tighter limits on banks' credit and asset exposures.


The CBB said in a statement on its website it plans to introduce an upper limit on commitments to underwriting securities or syndicated loans of 30 percent of banks' capital for a period of 90 days.

The regulator that oversees a regional banking centre also said it plans to introduce tighter limits on banks exposures to directors and associated companies.

The aggregate limits on this will fall to 25 percent from 40 percent for conventional banks, while the limits for Islamic banks will also be tightened.

The proposed new regulations also include a new definition of credit underwriting and caps on banks' temporary exposures to assets they plan to securitize or place with investors.

Banks will not be allowed to have exposure to such assets for more than 90 days and the exposure can not exceed 25 percent of their capital base.

The placement of real estate projects and private equity deals with investors has been the main revenue source for many of Bahrain's investment houses during an oil-fuelled regional property boom that ended 2008. Banks licensed by the CBB can submit responses to the consultation paper until March 10.END

No love lost between Dubai World, bankers on deal talk

If Dubai was floating a trial balloon with a rumored debt offer proposing a scant 60 cents on the dollar, it may have to think again.

Stock markets tumbled and bankers turned glum following a report that Dubai World [DBWLD.UL] was mulling offering creditors two options, neither one reassuring to investors already spooked by Dubai's debt debacle.

According to the report, Dubai World will offer creditors either 60 percent repayment over seven years and a government guarantee, or full repayment with a debt for equity swap for property assets of Nakheel and no guarantee. [ID:nLDE61D03G]

Mandelson urges swift action on Dubai debt restructuring

Time is running out for Dubai as it seeks to negotiate a standstill deal with bank creditors over multibillion-dollar debts at the Dubai World group, the UK business secretary has said.

The lack of agreement between Dubai World and banks over $22bn (£14bn, €16bn) in debts could not go on indefinitely, said Lord Mandelson.

He implored the Dubai government to be as open as possible in engaging with its creditors.