Will Dubai Default? Risk Grows As Dubai World Stops Payment
Equity and debt markets are reeling worldwide as investors grapple with the following:
Nov. 26 (Bloomberg) -- Dubai World, with $59 billion of liabilities, is seeking to delay debt payments, sending contracts to protect the emirate against default surging by the most since they began trading in January.
The state-controlled company will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due Dec. 14 from its property unit Nakheel PJSC, Dubai’s Department of Finance said in an e-mailed statement. Moody’s Investors Service and Standard & Poor’s cut the ratings on several state companies, saying they may consider the plan a default.
Contracts protecting against default rose 116 basis points to 434 basis points yesterday, the most since they began trading in January. The debt “restructuring may be considered a default under our default criteria,” S&P said in a statement.
Dubai, the second biggest of seven sheikhdoms that make up the United Arab Emirates, and home to the world’s tallest tower and the biggest man-made islands, suffered the world’s steepest property slump in the global credit crisis as home prices fell 50 percent from their 2008 peak, according to Deutsche Bank. UBS AG predicted a further 30 percent drop in a report last week.
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Making things slightly more interesting, we learn this morning in a research note from UBS that Dubai's debt might be much higher than the official $90 billion due to substantial off-balance sheet liabilities.
Nov. 27 (Bloomberg) -- Dubai, the Persian Gulf emirate whose state-run companies are seeking to defer debt payments, may owe more than the $80 billion to $90 billion in liabilities assumed by investors, UBS AG analysts said in a note.
“Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,” real estate analyst Saud Masud wrote in a note yesterday. “This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.”
Seeking a repayment delay may indicate that Abu Dhabi, the U.A.E.’s largest sheikhdom, may not want to support Dubai further financially until the smaller emirates addresses internal problems at government-run companies, UBS wrote.
The request could also suggest that Abu Dhabi and Dubai have decided to seek to bolster long-term confidence in the market by forcing weaker parts of government businesses to take responsibility for bad decisions, Masud and Cluse wrote. That could involve defaults at some Dubai firms, they said.
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Finally, Mark Mobius thinks it may trigger a 20% correction in emerging markets:
Nov. 27 (Bloomberg) -- Dubai’s attempt to reschedule debt may spur a “correction” in emerging markets, according to Mark Mobius, while the global slump in equities shows government spending alone won’t protect financial markets, Arnab Das of Roubini Global Economics said.
Mobius, who oversees about $25 billion of developing-nation assets as chairman of Templeton Asset Management Ltd., said a 20 percent drop for shares is “quite possible.” Stock volatility and risk aversion may jump as countries and companies default on loans, according to Das, the head of market research and strategy at RGE, the advisory firm founded by Nouriel Roubini.
Stocks retreated for a second day today, government bonds jumped and credit-default swaps climbed after Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment of debt. The MSCI Emerging Markets Index has slumped 4.7 percent in the past two days after more than doubling from its 2009 low in March.
“This may be the trigger to allow for the market to take a rest and pull back,” Mobius said in a Bloomberg Television interview by phone from Hanoi. “I felt that there would be a significant correction in what is an ongoing bull market,” he said. “If Dubai has to default, that could start a wave of defaults in other areas.”
Nov 27, 2009 at 10:16 AM
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Dubai World Seeks to Delay Debt Payments as Default Risk Soars
Dubai Crisis Means ‘Correction’ to Mobius, Risk Aversion to Das