Page 1 of 3 CREDIT BUBBLE BULLETIN Dubai watch
Commentary and weekly watch by Doug Noland
Global investors were left at the weekend pondering whether Dubai's standstill
agreement on corporate debt repayment is borrower brinksmanship or a serious
global debt problem and catalyst for a new round of global credit market
tumult. We've all got some work to do to get up to speed on this one. The
following might serve as a useful cribsheet.
November 26 - Financial Times (Simeon Kerr): "Sultan bin Sulayem, the chairman
of Dubai World, was on the hajj, the Muslim pilgrimage, on Thursday, when he
would have been with millions fasting and praying for forgiveness on Mount
Arafat. International investors are in a less forgiving mood after the
announcement that Dubai would be seeking a standstill agreement on the
government holding company's debt pile, most immediately $4 billion owed on a
bond held by the Nakheel property subsidiary that comes due on December 14. The
restructuring of Dubai World's debt has been in the works for some time, but
investors had grown confident that the Islamic bond, or sukuk,
guaranteed by state-owned Dubai World, would be treated separately and paid off
to maintain confidence in the trade and finance-oriented economy. 'I think a
lot of investors are feeling misled about the state guarantee and the chance of
the bond being paid on schedule, and we can see that disappointment in
Wednesday's closing prices,' said Raj Madha, banking analyst at EFG-Hermes in
Dubai. 'That's going to make it tough for Dubai to go back to the market in the
medium term, even if this bond is eventually paid."
November 27 - Financial Times (Jim Krane): "When you start building a third
island shaped like a palm tree, intending it to be as big and crowded as
Manhattan, you are crying out for a sober voice to bark: 'Stop!' But when that
island is just one atoll in an artificial archipelago that would reconfigure
the Persian Gulf coast into a thicket of trees, a map of the world, a whirling
galaxy, a scythe and a sun that looks like a spider, what you need is some
corporate restructuring. That, we learnt on Wednesday, was exactly what holding
company Dubai World, the parent of Dubai's chief coastal developer Nakheel,
would get. Last year, Robert Lee, one of Nakheel's executives, showed me a map
of the future Dubai Waterfront as his company put the finishing touches on the
more modest Palm Jumeirah, the skyscraper- and villa-crammed island that
started the trend. 'That's crazy!' I said. 'Bold,' countered Mr Lee."
November 27 - Zawya Dow Jones (Andrew Critchlow and Oliver Klaus): "Pressure
mounted Friday on oil-rich Abu Dhabi to step in with financial support for
Dubai after fears of a debt default by one of its state-owned conglomerates hit
stock markets in Asia and Europe. 'Abu Dhabi's support for Dubai might be less
generous than the markets have assumed so far. Perhaps Abu Dhabi has forced
Dubai to tackle the problem of excessive corporate debt 'in-house' first before
extending more financial support,' Swiss lender UBS AG said ... Persons close
to the Abu Dhabi government told Zawya Dow Jones Friday that the United Arab
Emirates as a whole won't allow Dubai to be crushed by the problems of its
troubled business conglomerate Dubai World. The company, which has $60 billion
of total liabilities, is seeking a debt standstill amid problems at its real
estate and investment units Nakheel and Istithmar World. Abu Dhabi helped Dubai
in February through the Central Bank of the UAE, which bought $10 billion of
emergency bonds for the emirate. Abu Dhabi banks majority-owned by the
government this week bought another $5 billion of Dubai sovereign debt. The UAE
is a federation of seven sheikdoms including Abu Dhabi and Dubai. Abu Dhabi is
the senior partner in the grouping and controls 90% of its vast oil reserves,
considered to by the world's fifth largest."
November 27 - Zawya Dow Jones (Alex Delmar-Morgan): "Dubai's carefully crafted
international reputation as a role model for the Middle East and international
financial hub is under threat, experts say. 'It's incredibly damaging,' Max
Clifford, the British public relations guru, told Zawya Dow Jones. 'Its image
as this wonderful, exciting place, where dreams come true are vanishing in a
matter of days. Globally it's being seen as a total failure,' he said ... World
markets have recoiled on fears that banks' exposure to Dubai's debts could
trigger a second financial crisis, in the manner of the the US sub-prime
mortgage debacle. 'Dubai's reputation has been impacted in a major way and it
will be difficult for the emirate to recover from the negative backlash in the
medium to long term,' John Sfakianakis, chief economist at Banque Saudi Fransi
... 'Currency and bond markets across the globe were also exposed to
developments that have become the source of the biggest destruction of
confidence in Dubai's history,' the note said."
November 27 - UK Telegraph (Richard Spencer): "Question: Where did Dubai go
wrong? I thought it was in the 'oil-rich Gulf'? Answer: Dubai is part of the
United Arab Emirates, seven city-states which have separate ruling families,
separate budgets, but security, immigration and foreign policies in common. Abu
Dhabi has nearly all the UAE's oil. To keep up, Dubai from the 1950s on
diversified its economy into ports, trade, services and finance, largely
successfully. But its liquidity-fuelled real estate and tourism binge in the
last decade may have been one step too far. Question: What is the extent of its
problems? Answer: The emirate has said it has $80 billion of debts, though some
analysts say the true figure could be double that. Dubai World, the state-owned
holding company whose bail-out plans triggered the current crisis, has
liabilities of about $60 billion, though only part of that is debt. The main
problem is its real estate subsidiary Nakheel, which has huge bonds coming due,
including an Islamic bond for $3.5 billion in December. It appears to have
little cash flow to meet payments - as well as relying on debt, it also sold
most developments off-plan, with new developments now on hold."
November 27 - Bloomberg (Anthony DiPaola and Chris Bourke): "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 ... "
November 26 - Bloomberg (Chris Bourke): "Nakheel PJSC, the Dubai-owned
developer whose parent is seeking to delay debt payments, may need $2 billion
to finish residential developments, according to an analyst ... Nakheel may be
liable for about 20% of an estimated $11 billion required to build 40,000 homes
that it and other Dubai developers have started, said Saud Masud, a real estate
analyst at UBS AG."
November 27 - Bloomberg (John Glover): "Bonds sold by Nakheel PJSC, a real-
estate developer controlled by Dubai, plunged more than 50% after the Gulf
state sought to delay debt payments ... Nakheel's $3.52 billion of 3.17%
Islamic bonds dropped to 50 cents on the dollar, from 71 cents yesterday and
107 cents on Nov 20 ... The notes were due to be redeemed at 109.5 cents on
Dec. 14."
November 27 - Bloomberg (Lester Pimentel): "Dubai's debt woes may worsen to
become a 'major sovereign default' that roils developing nations and cuts off
capital flows to emerging markets, Bank of America Corp. said. 'One cannot rule
out - as a tail risk - a case where this would escalate into a major sovereign
default problem, which would then resonate across global emerging markets in
the same way that Argentina did in the early 2000s or Russia in the late
1990s,' Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote
... "
November 27 - Bloomberg (John Kohut): "British banks have the most loans
outstanding to the United Arab Emirates in Europe, constituting $49.5 billion
of a total of $87.3 billion extended by the continent's lenders to the Gulf
country as of June 2009, Royal Bank of Scotland Group Plc said ... "
November 27 - Wall Street Journal (Stefania Bianchi): "Dubai's fragile
real-estate market could suffer another collapse in prices after the city-state
asked for a standstill on Dubai World's debt and its struggling real-estate
unit Nakheel. 'Should they effectively default, it can become one of the
biggest sovereign defaults since the Argentinean crisis,' said Marina Akopian,
partner at HEXAM Capital ... 'It will certainly have a very negative impact on
the Dubai property market and I suspect on property markets globally.' ... An
estimated 50% has been wiped off the average price of real estate in the
emirate since its peak ... Earlier this month, UBS said Dubai property prices
could drop a further 30% over the next 18 months and may take at least 10 years
to recover ... 'This type of crisis brings fundamental weaknesses to the
surface faster. This could play out in the next six months or so," he said. UBS
said one of the biggest concerns for Dubai real estate is the "funding gap" to
finish properties that are already started and on which investors are
defaulting. The bank estimates that $11 billion is needed to complete an
expected 40,000 residential units by the end of 2010.
November 27 - Reuters: "Abu Dhabi Commercial Bank has at least 8-9 billion
dirhams ($2.18-$2.45 billion) exposure to Dubai World and related entities,
which will require the bank to book more provisions, an senior executive of the
bank said. 'We have to face the stress that will be caused to our balance sheet
and profit and loss account due to this exposure to Dubai World and associated
companies because it is a default,' the executive, who declined to be named,
told Reuters ... "
November 27 - Wall Street Journal (Chip Cummins in Dubai and Dana Cimilluca and
Sara Schaefer Munoz): "Investors sold banking stocks across Europe and Asia and
jacked up the price of insuring against Dubai defaults, a day after the
government said it would take charge of restructuring its corporate flagship,
Dubai World, and asked creditors to accept delayed payments. A ... six-month
standstill in debt payments took investors and analysts by surprise. It
followed months of positive moves and comments from government officials
suggesting Dubai and the federal government of the United Arab Emirates were
willing to step in to plug financing holes. 'The most negative effect of [the]
announcement is a major shock to confidence in the UAE and the region more
generally,' said Richard Fox, a credit analyst at Fitch ... 'People will now
question government support.'"
November 27 - UK Telegraph: "Let's be generous here. Maybe Dubai was just
trying to set another record. It's already given us the biggest building,
biggest indoor ski slope, biggest shopping mall and biggest theme park. Surely,
it was only a matter of time before it went for another biggie: the biggest
debt-market cock-up. Just have a squint at the planning that went into this
one. Here's the latest from Sheikh Ahmed bin Saeed Al-Maktoum. 'Our
intervention in Dubai World was carefully planned and reflects its specific
financial position,' declared the chairman of the grandly titled Supreme Fiscal
Committee. 'The government is spearheading the restructuring of this commercial
operation in the full knowledge of how the markets would react.' Sadly, the
Sheikh did not spell out all the careful planning that went on."
November 27 - Bloomberg (Francois De Beaupuy): "French Prime Minister Francois
Fillon said Dubai's request to reschedule debt repayments shows the global
financial crisis "is not over" and that stimulus efforts must be maintained to
avoid "breaking the weak recovery'."
WEEKLY WATCH
For the week, the S&P500 was little changed (up 20.8% y-t-d), while the Dow
slipped 0.1% (up 17.5% y-t-d). The Banks fell 1.5% (down 2.9%), and the
Broker/Dealers sank 4.4% (up 43.3%). The Morgan Stanley Cyclicals dipped 0.1%
(up 64.1%), and Transports declined 0.6% (up 10.9%). The Morgan Stanley
Consumer index added 0.2% (up 22.1%), and the Utilities gained 1.0% (down
0.8%). The S&P 400 Mid-Caps declined 0.5% (up 27.0%), and the small cap
Russell 2000 dropped 1.3% (up 15.6%). The Nasdaq100 added 0.1% (up 45.7%), and
the Morgan Stanley High Tech index gained 0.1% (up 59.7%). The Semiconductors
rose 0.6% (up 46.0%). The InteractiveWeek Internet index declined 0.4% (up
66.5%). The Biotechs rallied 2.2% (up 36.8%). Although bullion jumped another
$27, the HUI gold index slipped 0.3% (up 55.9%).
One-month Treasury bill rates ended the week at 5 bps, and three-month bills
closed at 2 bps. Two-year government yields dropped 8 bps to a new low 0.60%.
Five-year T-note yields sank 19 bps to 1.95%. Ten-year yields were 17 bps lower
to 3.20%. Long bond yields fell 9 bps to 4.21%. Benchmark Fannie MBS yields
dropped 21 bps to 3.92%. The spread between 10-year Treasuries and benchmark
MBS yields narrowed 4 to 72 bps. Agency 10-yr debt spreads narrowed one basis
point to 45 bps. The implied yield on December 2010 eurodollar futures declined
5.5 bps to 1.125%. The 10-year dollar swap spread declined 1.5 to 9.5 bps, and
the 30-year swap spread declined 4.0 to negative 15.5 bps. Corporate bond
spreads were mixed. An index of investment grade bond spreads narrowed 9 bps to
141, while an index of junk spreads widened 14 bps to 590 bps.
November 27 - Bloomberg (Gabrielle Coppola): "Cisco Systems Inc. and U.S.
wireless carrier Clearwire Corp. led $96.9 billion of bond sales this month,
the busiest November since 2006 ... November sales compare with $45.8 billion
last year and $125 billion in 2006 ... "
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