Dubai World Restructuring: Sovereign Risk Shock or No Big Deal?

Today, a story about the need to restructure state-owned Dubai World created a bit of a frisson. Dubai is proposing to delay debt payments as it negotiates to extend maturities. According to 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.

“Extending the maturity of Nakheel debt is feeding the market’s uncertainty on which debt Dubai will honor in full,” said Rachel Ziemba, a senior analyst covering sovereign wealth funds at New York-based Roubini Global Economics. “They look desperate and the market is concerned that in the long term Dubai’s indebtedness is rising not falling.”

Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before credit markets seized up last year. Contracts protecting against default rose 116 basis points to 434 basis points yesterday, the most since they began trading in January, ranking it the sixth highest-risk government borrower, according to credit-default swap prices from CMA Datavision in London. The contracts, which increase as perceptions of credit quality deteriorate, are higher than Iceland’s after climbing 131 basis points in November, the biggest monthly increase since January….

Investor concern is growing because the emirate hasn’t disclosed how it will pay more than $9 billion of debt coming due in the next four months. Dubai said yesterday it borrowed $5 billion from Abu Dhabi government-controlled banks, half the $10 billion Dubai ruler Sheikh Mohammed Bin Rashid Al-Maktoum said he planned to raise by yearend.

“There is no clarity about what exactly is happening,” said Emad Mostaque, a London-based Middle East equity-fund manager for Pictet Asset Management Ltd., which oversees more than $100 billion globally. “They have to clarify if there is going to be a voluntary rollover or if there is going to be a forced rollover. If there is a forced rollover it will mean technical default. If they don’t clear this up then the whole market will want to sell.”

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.

Yves here. On the one hand, there has been a reassuring announcement:

The Department of Finance said yesterday it raised an additional $5 billion from two Abu Dhabi lenders as part of its $20 billion Dubai support fund geared toward meeting its financial obligations.

However, Dubai is seeking a standstill on its debt while it renegotiates. I’m not a credit default swaps expert, but that sound like an event of default to me, and if so, that has the potential to have all sorts of repercussions. First, creditors who are not fully hedged who are subject to mark to market reporting will show significant losses. Second, the CDS protection sellers will also be showing losses and posting collateral.

One analyst has already deemed the risk to be overblown, and if the restructuring happens quickly and does not involve much in the way of losses to creditors, this indeed may not be a big deal.

But I got a message from someone who was on the conference call that suggested otherwise. Some European banks may be on the wrong side of this trade. As readers may know, EuroBanks went into the crisis with even lower capital levels than their US counterparts, and have taken fewer writedowns of their dodgy exposures:

The standstill announcement…was a massive surprise. One could sense the panic in those asking questions….this could be the turning point in spreads and could be viewed similar to the Russian debt crisis in 1998 or the Bear situation in 2007…based on companies and the accents of the people asking questions, it is obvious European institutions will be hit hard…Dubai made this announcement at the beginning of a four day holiday, so there will be little news until next week…There is another wave of pain out there. This information does not seem to be making its way to other markets. It will.

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  1. fajensen

    Bwahaha – Maybe that is where the Danish provisions for bank sector losses lies buried – and the reason Denmark is “Second To One”, The UK … with about 15 times the population size of Denmark?

    I hope for Defaults, lots of them. I would soo love to see the Banksters and the Friends of Banksters squirming after it becomes reality that they have blown about four times the GDP on Nothing!

    Following is a table of European government’s commitments. All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.

    United Kingdom 781.2
    Denmark 593.9
    Germany 554.2
    Ireland 384.5
    France 350.1
    Belgium 264.5
    Netherlands 246.1
    Austria 165
    Sweden 142
    Spain 130

    PS: Was I Dubai, I would spread rumors about a default then use the money I got from the sudden increased value of the CDS’s I hold on my own debt to buy as much as I could it back cheaply in the market. Then leverage the bonds, then make payments again. The debt would be “gone” in no time at all. The Market is best played by Calwinball Rules!

  2. i on the ball patriot

    The ‘progressively connected deceptions’ are rumbling. The alarm bells jingle …

    Will this be sufficient to release the elastic strain of deception energy stored up in the entire system, or are we looking at just another well planned and metered out release of a localized planar fracture?

    Deception is the strongest political force on the planet.

    1. psychohistorian

      Certainly the latter and still unsure about the former….we can only hope this play changes acts soon.

  3. Mark G.

    No worries. Dubai’s central banker al-Bin ben Rashid Al Bernanke announced the losses are contained.

  4. vl

    Checking here, CDS on Dubai do trade with restructuring clause, but can’t get the details right now. So it could well be a default event.

  5. mark

    Your e-mail correspondent who was on the conference call wrote:

    “this could be the turning point in spreads and could be viewed similar to the Russian debt crisis in 1998 or the Bear situation in 2007”

    Given the current state of the world economy the sudden collapse of Creditanstalt in May 1931 is a more apt comparison. Eighteen months into that long ago crisis many thought that the worst was over and that the monetary and fiscal authorities had avoided a 19th century style prolonged slump.

    1. Andrew Bissell

      Little did they know they were in for a 20th century style slump, which was orders of magnitude worse!

  6. Siggy

    I am reminded of the time when I heard on the BBC short wave, the Chancellor of the Exchequer said at 11:50 PM, or thereabouts, that Britain would not devalue. At 12:05, or thereabouts, it was announced that Britain would devalue.

    These announcements are probably an event of default in themselves. Thus, if Dubai holds CDS against itself, it is probably making some money as we speak.

    Always wondered how it was that Dubai could build all those lovely sand dune islands and see-thru things. A veritable architects plaground.

    We may be looking at a catalyst event that brings selling pressure to the markets as collateral calls are issued.

  7. Anonymous Jones

    Just to provide a little color…

    I have a few high level contacts in the region, and it has long been assumed from the inside that Abu Dhabi would “bail out” Dubai, but in a very strategic manner. For those who don’t know, Abu Dhabi and Dubai are emirates with very centralized family control. However, the similarities end there. Abu Dhabi has *far* more money than Dubai because of disparate oil revenues. It is not even close. And the people in Abu Dhabi are not stupid. They know this is a long term economic and political struggle, with a horizon centuries long. Khalifa is going to get political concessions from Dubai and economic concessions from Dubai’s creditors and then consolidate power. In the end, Abu Dhabi will have used Dubai to house their workers, raise the profile of the UAE, provide infrastructure for growth, all on other peoples’ dimes.

  8. ernie

    trade of the day

    buy those nakheel 2010s at 70 while you can

    next week Abu Dhabi will make some apologetic announcement for the confusion and these things will bounce back up again

    come on Abu Dhabi has over $650bn of assets… are they really going to let their reputation be ruined for the sake of a 3.5bn payment (which they can now buy for 2.45bn!)

  9. Vinny G.

    I thought a year ago Dubai was one of the sovereigns with lots of cash hanging around, able and (almost) wiling to save the rest of the world from its debt burden.
    What happened?…


  10. David

    Shouldn’t the leaders of Dubai, Dubai World, Nakheel etc. be put in jail? After all, that’s what they do to others who don’t pay their debts in Dubai.

    1. NOTaREALmerican

      > be put in jail?

      At least they should have their 5th appendage cut-off. Seem appropriate for a “finance master of the universe” dude.

      1. Vinny G.

        Or, at least confiscate their harems, and return those poor women and girls to the countries from where they were kidnapped and trafficked from by these pathetic perverts and pedophiles.

        And, while at it, why not allow all those millions of workers from India, Pakistan and Palestine, who are kept there in subhumane conditions to return to their countries.

        I don’t know why, but on this Thanksgiving day, I have difficulty finding any compassion in my heart for these backward 9th century as*holes, pading around in their stupid bedsheets.


        1. ZA

          It’s very hard to imagine even the smallest measure of public goodwill toward a bailout that benefits anyone who lent to build garish palm tree islands and airports in the middle of the desert with twice the capacity of O’Hare.

          1. Vinny G.

            Exactly. I give them 5 years before they all move back into tents and start screwing camels again…lol


          2. David

            I was briefly in Dubai 15 years ago, before all this craziness, and it was a good place with nice people, unusually nice. Yes that includes the citizens, but I didn’t meet any bigshots, just normal people.

            Of course it was hot as hell. It was 100 degrees F when we landed and got off the plane, and that was midnight! During the day they told me it got to 140F and everyone took a 4 hour siesta from noon to 4pm.

            I don’t think I would like the place as much now, with or without the default!

  11. BenF

    sovereign cds contracts largely(like almost 100 percent) contain a standard restructuring clause pre 2003. a restructuring of public debt is viewed as a much more precarious situation than corporate debt.

  12. Francois T

    The timing of this announcement is interesting: Wednesday after the close in the US markets, just before Thanksgiving Day.

  13. Hugh

    What this suggests is that the sovereign wealth funds were speculating like other financial players. A lot of what they hold is probably illiquid and fallen in value. The major difference is cash flow. Dubai got burned because it didn’t have a large oil spigot to grease its short term problems. This should remind us that all the big players of whatever kind have heavy losses that they are hiding by A) marking their assets to fantasy and B) hedging with CDS that will prove worthless in a systemic event.

  14. Donlast

    Dubai selling CDS to pay for liquidating some of its debt does not seem plausible. It would have to hold an awful lot of CDS to make a worthwhile dent in its debt load; and in liquidating a huge tank load of CDS it would move the market against itself.

  15. Billy Liu

    Dubai selling CDS to pay for liquidating some of its debt does not seem plausible. It would have to hold an awful lot of CDS to make a worthwhile dent in its debt load; and in liquidating a huge tank load of CDS it would move the market against itself.

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