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Cost of Insuring Dubai Debt Drops 
in ‘Benign’ Credit Market

DUBAI — In a positive reaction from global credit markets, the cost of insuring Dubai’s debts against a possible default dropped sharply soon after Dubai World Group announced its $26 billion debt-restructuring plan on November 30, a regional investment bank said.

The average price of insuring Dubai’s debt with instruments known as credit default swaps, or CDS, plummeted from 549.0 basis points — a high reached two days after Dubai World’s request on November 25 for a debt standstill of at least six months — to 482.6 basis points soon after the debt-restructuring move last Monday, HC Securities and Investment said in a strategy note.

HC said on Saturday that “the reaction in credit markets has been benign. We feel that the technical nature of the fundamentals currently underpinning international credit markets are far more sound than at this point in time almost a year ago when Lehman Brothers went bankrupt and credit markets closed. We feel companies will be able to negotiate new financing as a result of credit markets operating efficiently.”

The investment firm said it was unlikely that bondholders would vote to force Dubai World into liquidation, given rising levels of liquidity in the market and a growing appetite for risk among lenders and investors.

HC argued that the market reaction to Dubai World’s request for a delay in its debt repayments was overblown. Dubai’s one-year CDS spread more than doubled to 549.0 points on November 27 from 268.8 points on November 24.

“We believe the reaction to the news of Dubai World’s debt in both domestic and international markets has been overplayed. The international banks’ exposure to this company is just a drop in the ocean when compared to the huge amount of toxic assets wiped out during the global financial crisis,” HC said in its note.

Quoting data from the Bank for International Settlements, HC said that among international banks, those based in Britain have the largest exposures to the UAE, at an estimated $49.9 billion. HSBC and Standard Chartered are the most exposed, with outstanding loans totalling $17 billion and $12.3 billion, respectively, to Dubai World, HC said.

“The support of the federal government has been incorrectly assessed by the broader markets. Once this uncertainty has been removed, we would expect to see equity markets recover quickly,” the bank said.

A senior economist at Barclays Capital told reporters in a conference call on Wednesday that Dubai would have to refinance about $35 billion of debt that is set to mature in 2010 and 2011.

The London-based economist Alia Moubayed estimated that the UAE’s total foreign currency-denominated debt stood at $211 billion by the end of 2008, equivalent to 84 per cent of the country’s gross domestic product. Dubai-based institutions accounted for 57 per cent of these debts, which were used to finance large infrastructure and real estate development projects, she said.

Moubayed said that a solution to Dubai’s debt problem would depend partly on the “the ability of the Dubai government to come up with a clear plan in terms of what it wants to do to restructure its institutions and the debts related to that.”

issacjohn@khaleejtimes.com