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Thursday, 25 March 2010

Dubai Shares Rise, CDS Fall as Dubai World Announces Debt Plan

Dubai shares climbed the most in three months, Nakheel PJSC’s bond jumped and credit default swaps fell after Dubai said the government will support state- owned holding company Dubai World with as much as $9.5 billion.

Emaar Properties PJSC, developer of the world’s tallest skyscraper, rose 8.8 percent and Emirates NBD, the United Arab Emirates’ biggest bank by assets, advanced to the highest since December. The DFM General Index gained 4.3 percent, the most since Dec. 14, to 1,845.21. Nakheel’s $750 million Islamic bond maturing in January surged to 94.375 cents on the dollar at 4:36 p.m. in Dubai, Bloomberg prices show. Credit default swaps linked to Dubai plunged 38 basis points.

Dubai, the second biggest of seven states that make up the U.A.E., and its state-owned companies ran up $80 billion in debt until the end of 2008 to transform the sheikhdom into a tourism, trade and financial hub. Dubai World said in November it would seek to delay paying debt until at least May, sparking a plunge in developing-nation stocks and Nakheel bonds. The company said today it will pay Nakheel bondholders in full if the debt restructuring plan is accepted by banks.

Dubai's Generous Restructuring Proposal

What a difference four months makes. Having sent global markets into a tailspin in November with a high-handed shock announcement of a $26 billion debt restructuring, Dubai now has offered a very creditor-friendly deal on Dubai World and Nakheel debt. The markets welcomed the plan. But one longer-term fear might be that this odd restructuring is actually too generous.

That it is generous is clear from the terms: The Dubai government is proposing to convert its $10.1 billion debt claims on Dubai World and Nakheel into equity, thus subordinating its claim to other creditors. It is then offering to inject $9.5 billion of fresh cash—$3.8 billion from its own resources and $5.7 billion from an undrawn loan from Abu Dhabi—suggesting that this deal has the tacit approval of its richer neighbor. Stunningly, holders of Nakheel's Sukuk bonds due in 2010 and 2011 will be paid in full and on time if the deal is approved.

Bank creditors should also get repaid in full, although maturities are being extended. Dubai World's lenders are being offered new five-year and eight-year debt carrying an as-yet-unspecified interest rate. Nakheel bank lenders will be asked to roll over existing facilities at a new rate.

This was better than the market was expecting, with talk previously circulating of haircuts on principal as well as extensions on debt maturities. Unsurprisingly, Dubai stocks rose 4.3%, the cost of insuring the emirate's debt against default fell around 0.50 percentage point to 3.75 percentage points and Dubai-related corporate bonds rallied.

One important implication of the lavish treatment for bondholders may be that Dubai's companies regain access to international funding; a capital -markets default could have complicated refinancing.

Dubai has taken a big step to repair the damage caused by last November's shock. But to some extent, the restructuring proposal involves the emirate doubling down on its damaged economic model, underlined by its continued belief that Nakheel—the constructor of the iconic palm-shaped islands that have become a symbol of excess—is a key part of the economy.

Dubai is betting on a recovery in real estate and financial markets to lift the value of the assets, enabling the debt to be repaid later and the equity stake to generate value for the government. If that bet fails, then all Thursday's proposal will have achieved is to kick the can down the road. That, however, would be a familiar tale from the financial crisis.END

Bahrain SWF considers first hedge fund investment

Bahrain’s $14bn sovereign wealth fund (SWF) is considering making its first ever allocation into the hedge fund sector, HFMWeek can exclusively reveal.

The Bahrain Mumtalakat Holding Company, which was established in June 2006, has confirmed that it is looking to invest into the asset class as early as next year. Hani Redha, an investment manager at the SWF, told HFMWeek, “yes, we are looking at potentially investing in hedge funds in the future. It won’t happen this year, but the following year is a possibility.”

Redha revealed that it would be the fund’s first allocation to the alternative space, citing desire for diversification as the driving force behind the SWF’s decision. It has not yet been confirmed what proportion of the fund’s investment portfolio would be invested into the sector.

Bahrain enters top 30 economies ranked by World Economic Forum

Bahrain has entered the top 30 economies ranked by the World Economic Forum’s (WEF) Global Information Technology Report, published today. A climb of eight places for the second year running puts the Kingdom 29 of 133 economies worldwide.

Bahrain is the highest climber of the Gulf nations in this year’s rankings and over a three year period, having gained 21 places since 2006. Now a close second in the region, the Kingdom’s rise reflects a commitment to ICT as both a sector in its own right and an enabler of continued economic growth, modernisation and competitiveness, according to Kamal Ahmed, Chief Operating Officer of the Bahrain Economic Development Board (EDB).END

Qatari PM sees 2010-11 GDP growth at 16 pct

The Qatari economy is expected to grow by some 16 percent in 2010-11, Prime Minister Sheikh Hamad bin Jassim al-Thani told an investment forum on Thursday.

"We are forecasting growth of 16 percent in 2010-2011," al-Thani said, according to an English translator.

The economy in Qatar, the world's largest natural gas exporter, is expected to largely outperform that of its fellow Gulf oil producers in the coming years due to massive expansion of its gas facilities.

Al-Thani also confirmed it expected to boost its liquefied natural gas production capacity to 77.4 million tonnes per year by 2011 from 56 million tonnes currently.END

Comparing the debt crises in Dubai and Greece

Due to the financial crisis a number of overleveraged countries have had to quickly make a plan to avoid default. This has sent shivers down the spine of stock markets. A market commentator makes some interesting observations as to why Dubai's troubles were defused while Greece lingers.

Ashraf Mohamed, head of capital markets at Regiments Fund Managers, gave his views in the Market Review podcast.

"The advantage for the UAE was that Abu Dhabi had a big chequebook. The problem for the euro area is that neither France, nor Germany actually have that chequebook because their commitments to pensions and to infrastructure is such that it will put themselves into deficit.

It's hard to keep up with it all. (Re-post)

So the word is out about the Dubai World plan. The markets seem to love it.

So I have read the press releases and someone was nice enough to send me a transcript of the conference call. Naturally I'll have to write more extensively a bit later but my initial thoughts are the following:

1.) As I would have imagined much more support is being given to Nakheel than to Dubai World both because it needs more and also because it's creditors are more likely to be hostile.

2.) The support of Abu Dhabi in this is conspicuous for its absence. Dubai is basically draining to zero the DFSF and throwing in additional money from the Emirate of Dubai and converting what debt is owed to Dubai to equity putting itself behind other creditors. It is a Dubai only show.

3.) Despite the cash injection Nakheel is explicitly not granted any government guarantees. During the conference call the spokesperson declined to comment on any government guarantees of Dubai World itself on account of a "confidentiality agreement." I'm not sure what that means. How can a government guarantee instill confidence if it is protected by a non-disclosure clause. Seems kind of self defeating.

4.) The Nakheel restructuring plan is quite complex. $9.5 billion goes in from Dubai and the DFSF to "fund operations and liabilities." Fund operations? It seems that they are very concerned about a group of creditors which I have not so far considered on this blog: the people who bought real estate off plan and whose projects have stalled. It seems they are going to put the funds toward continuing construction and will offer swaps to off plan installement buyers in the developments which can be completed. They are also going to pay off trade creditors for under $500,000 in full and creditors over that amount will get 40% in cash and 60% in a "tradable security" so that they recieve 100% of their credit back. Anyone want to bet with me that the "tradable security" will trade at a substantial discount to face almost immiediately?

5.) I'm not sure what all this means for the Nakheel Sukuk holders. They seem to me to continue to bear a substantial amount of risk to Nakheel, Nakheel's execution capaility and through that to Dubai real estate in general. As I mentioned in my last post about this the trouble for Nakheel is that it can't raise new capital to continue its operations. So what Dubai is doing is going all in, not to secure the sukuk holders, but to continue operations. To do so it is using the money to continue construction, but is only paying out existing trade creditors 40% plus some "tradable securities."

Looking at the balance sheet of Nakheel as of June 30 2009, it seems that the accounts payable represent 28 billion AED, 40% of which is 11.2 billion AED or $3 billion. So now there is $6 billion left to fund operations and pay liabilities. Presumably the reason they want to continue operations is so that they can actually recieve some of the 17 billion AED they are owed in off plan installments but I wonder how much of the remaining $6 billion will be required to do that. The press release says a "substantial" amount will go toward construction.

If I were a sukuk holder I would sell on this pop.

6.) Interestingly I'm not sure the sukuk holders will get a chance to vote on the proposal because in the view of Dubai World they are unaffected assuming all other stakeholders agree to their restructuings. There are no changes to the terms of the sukuks being made. This is almost certainly because the sukuk holders are likely to be the mst recalcitraint group.

7.) The Nakheel proposal is very complex and requires a lot of people to agree to things which seem a little far fetched. Trade creditors have to take an opaque haircut determined by the degree to which their "tradable securities" trade at a discount. The bank creditors all need to agree to extend maturities. Owners of non-existent apartments on non-existent islands have to agree to take villas that are actually being constructed in a different location. There are a lot of moving parts and I think this announcement is a major step forward. However, I don't think this story is over.END

More fiscal coordination among Gulf states urged

Gulf central bank chiefs called on Wednesday for more coordination to achieve financial stability and face continued fallout from the global economic downturn. The meeting was told that the board of directors of the GCC Monetary Council would meet in Riyadh next week.

“This period necessarily requires that our attention is focused on issues related to achieving financial stability,” Kuwait central bank Gov. Sheikh Salem Abdulaziz Al-Sabah said in his opening speech.

“Inflationary pressures have greatly declined, but this does not mean they have disappeared... This has enabled Gulf central banks to adopt measures to face the impacts of the global financial crisis” and of slow growth, he said.

Dubai Government statement on DW and Nakheel restructuring english 25032010.pdf

NY hearing to focus on venue for fraud case

Lawyers are set to debate today whether New York is the proper forum for claims against Maan al Sanea, the Saudi billionaire accused of a US$10 billion (Dh36.72bn) fraud against Ahmad Hamad Al Gosaibi and Brothers, a Saudi family-owned conglomerate.

The hearings spring from cases originally brought last summer in New York by the Dubai-based Mashreqbank against the Al Gosaibi group after it defaulted on a foreign exchange transaction worth $150 million. Al Gosaibi has acknowledged the default, but claims it was due to Mr al Sanea’s alleged fraud.

Mr al Sanea, who is accused of carrying out the fraud when he headed Al Gosaibi’s remittance business, has denied the charges.

UAE bourse merger seen more likely as deals slump

A slump in trading revenues and Dubai's parlous financial state could lead to a merger of the United Arab Emirate's two main stock exchanges, analysts said.

The Gulf Arab emirate has three bourses -- the Abu Dhabi Securities Exchange (ADX), Dubai Financial Market (DFM), and Nasdaq Dubai -- each fighting to draw liquidity.

"The UAE is a small country with a very small population, so having three exchanges is totally absurd and defies logic," said Shakeel Sarwar, head of asset management at Sico investment bank in Manama.

Bahrain To Sell $1.25B 10-Year Bond At 200 Bps Over Treasurys

The Kingdom of Bahrain is set to price a $1.25 billion 10-year bond Wednesday that will offer 200 basis points over comparable U.S. Treasurys, according to a person familiar with the deal.

The 144a sale is being managed by BNP Paribas SA (BNPQY, BNP.FR), Deutsche Bank (DB) and J.P. Morgan Chase & Co. (JPM).

The offering comes on the heels of a roadshow that ends Tuesday, where officials will met with investors in the U.S., Europe and Asia.

Bahrain has an A rating from both Standard & Poor's and Fitch. The securities mature March 31, 2020.

The deal's announcement suggests that the international capital markets may be opening again for Middle Eastern credits. Few new bond deals have come out since Dubai's flagship conglomerate Dubai World sent ripples across global markets in November when it asked for a six-month standstill on payment for $26 billion of debt. Details of the restructuring have yet to emerge.

Since then, Lebanon became one of the first sovereign issuers out of the region when it raised $1.2 billion in 10-year bonds earlier this month. The securities carried a coupon of 6.375%.

Many regional companies and governments joined the issuance boom of 2009, including Qatar, whose $7 billion offering was the largest ever deal from the developing world.END

Comment: Gulf must navigate a bumpy road

This year may prove to be another tough one for Middle East banks, with rising non-performing loans restricting their willingness and ability to extend credit.

Despite ample capital and liquidity, lending declined last year and is expected to remain subdued in 2010. Bank profits dropped 10 per cent last year and now stand on a par with 2005, a time when the banking system’s asset and equity base was about half the present level.

Overexposure to property and highly leveraged companies has eroded asset quality. Provisions jumped fivefold from their 2007 level. The crucial factor driving credit quality this year will be the ability of companies to improve liquidity and extend debt maturity profiles.

Kuwait remains in money market pain

Kuwait’s stock market may this year be tentatively recovering from the global financial crisis, but the country’s money market funds are still in intensive care.

There are relatively few money market funds in the Gulf, but Kuwaiti investment companies and banks manage dozens. These had assets of about KD1bn at the market peak in 2008, according to estimates by Kamco, the asset management arm of Kipco, an investment company backed by the Kuwaiti royal family.

Money market funds typically invest in short-term debt securities such as Treasury bills and commercial paper, and – although some US funds wobbled in the wake of Lehman Brothers’ bankruptcy – are usually seen as a safe and liquid investment for both institutions and individuals.