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Cost of Insuring Dubai’s Debt Plunges

DUBAI - The cost of protecting investors against Dubai defaulting on its debt tumbled the most since February after Abu Dhabi pledged $10 billion to help the emirate meet its obligations.

Five-year credit-default swaps on Dubai’s debt fell 115 basis points to 425.5, according to CMA DataVision prices at 11:40 am in London. The Markit iTraxx SovX Western Europe index of swaps on 15 governments dropped 4.75 basis points to 62, according to JPMorgan Chase & Co.

“A rally on Abu Dhabi’s support is clearly helping Asian and European credit this morning,” Puneet Sharma, head of credit strategy at Barclays Capital in London, wrote in a 
note to investors.

Credit-default swaps on DP World Ltd., the Middle East’s biggest port operator and a unit of Dubai World, fell 128 basis points to 443, according to CMA. Abu Dhabi slipped 12.5 basis points to 148 and Abu Dhabi National Energy Co. fell 32 to 217. Qatar dropped 9 to 99.5. The decline in default swaps tied to Dubai government debt was the biggest since Feb. 23, when the U.A.E’s central bank bought $10 billion of the Gulf state’s bonds.

Abu Dhabi’s support for its neighbor “will no doubt be taken as very good news by the market,” Gary Jenkins, head of credit research at Evolution Securities Ltd. in London, wrote in a note. Credit-default swaps on European companies also fell on news of the Dubai bailout, with contracts on the Markit iTraxx Crossover Index of 50 mostly high-yield European companies slipping 8 basis points to an 18-month low of 475.5, according to JPMorgan.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 1.5 basis points to 79.5. The Markit iTraxx Financial Index of 25 banks and insurers decreased 1.25 to 78.25 and the subordinated 
debt index dropped 3 to 143, JPMorgan prices show.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A basis point on a contract protecting €10 million ($14.7 million) of debt from default for five years is equivalent to 1,000 euros a year.