Since the November standstill announcement, little information was released from either Dubai World or the government to reassure investors. Discussions with creditors have been inconclusive to date and it is expected the market to remain nervous until more clarity is given.
The bailout from Abu Dhabi to help repay the US$4bn Nakheel bond in December has significantly enhanced confidence in investors that Abu Dhabi will continue to play a supportive role in debt restructuring processes for Dubai Inc credits, which suggests that the likelihood of an extreme downside scenario for Dubai World creditors, such as bankruptcy/liquidation, or restructuring with a punitive haircut is now much lower.
However, the government support mechanism and its communication will now be viewed, quite rightly, as a more unpredictable process and spreads are likely to remain volatile until a formal standstill agreement is reached.
Below are highlighted the key implications or risks in the near term for investors, outlined in the latest MENA Quarterly report from Bank of America Merrill Lynch – Global Research, dated 15 February 2010 and authored by the Emerging Markets research team at Bank of America Merrill Lynch Global Research.
A higher risk premium across the region will remain
- While the final outcome for holders of Nakheel was very positive, events of Q4 of 2009 have lead to significant reassessment in the market of the risks of investing in UAE credit.
- It is natural that this will require higher spreads for both government and quasi-sovereigns in the UAE, relative to those that prevailed before November’s standstill announcement.
- This will partly reflect technicals – the immense shortcomings in communication and associated extreme price volatility in supposedly investment grade securities, has already and could still lead some investors to materially reduce their ongoing appetite for GCC risk in our view.
Restructurings uncertain, but disaster scenario unlikely
Creditors to Dubai World are still in the position of being in the early stages of what could be a lengthy restructuring process (estimated US$22bn in debt still to be restructured by May-10). Talks with bank creditors have been inconclusive to date. Recent news reports, Al Ittihad newspaper, indicate that Dubai World is trying to have the standstill agreed and formalised with creditors this month. The information void from Dubai World (on available funds, asset sales,restructuring timeline) continues to cause concern in the market, resulting in Dubai CDS spreads edging progressively wider.
A relatively benign outcome for the Dubai World restructuring is highly probable – limited haircuts, but meaningful extensions to debt maturities. This is a highly political process (i.e. Abu Dhabi support) where visibility is not high and actors have the propensity to act irrationally.
The reasons for this conclusion are the positive feedback from local banks on the restructuring talks to date: the systemic nature of the Dubai construction industry for the UAE economy and banks, combined with the high level of Abu Dhabi wealth (estimated reserves of c$600bn) relative to the Dubai debt problem ($22bn in Dubai world restructuring; and perhaps that much again in “problematic†debt at other entities).
