- It has been relatively quiet in the regional markets (thankfully) as we head into the Holiday season.
- Yesterday saw Dubai's 5 yr sovereign spread more or less unchanged at 435 bps and Abu Dhabi 5 yr CDS was trading marginally tighter at 150 bps.
- The Dubai sovereign sukuks closed a touch lower, after a pop early in the day. Seems like investors are continuing to book profits in this name, as it moves closer to par levels. Our flows were skewed towards better buying on both the USD and AED issues.
- We continue to see selling in most Dubai Inc names (DIFC, Jafza, DPW) and saw them close ¾ to 1 point lower on the day.
- In Abu Dhabi names, the theme from last week continues with better buying in ADGB sovereigns and selling in the quasi sovereigns (Mubadala, Taqa & Dolphin).
- We are seeing good 2 way flows in Aldar14s at 104 level. (Though Aldar 14's are yielding 7.53% today, going into year end, with negative sentiment surrounding the UAE and a potential Moody's downgrade looming on the immediate horizon, I wouldn't be a buyer today – I always come back around to the same thought process – What is he likelihood that I can buy this bond at similar, if not better levels in the near term? I think the likelihood is high.
- Qatari sovereign paper was more or less unchanged on the day and the Qtel19s, trading at 113, was seeing better buying interest.
- Reuters published an article last night titled "Dubai May Repay Nakheel's outstanding 2010, 2011." The article quotes a number of bankers and a particular London based hedge fund manager who believes that Western investors, who didn't have previous exposure to the region are using Abu Dhabi's bailout as a catalyst to become interested in quasi-sovereign Dubai entities. I agree with the Moody's analyst who is quoted in the article with the fact that this is a dangerous strategy. I believe that one thing that has been made very clear over the past few weeks is the fact that there is no blank cheque from Abu Dhabi to pull Dubai out of its debt based quagmire. Selected assets will be supported, depending on their significance to the Emirate, and to the UAE, in the larger sense. The Nakheel 09 sukuk was an anomaly – a company that would not have received this sort of attention in alternate circumstances. The fact that the sukuk was so widely held, carried a Dubai World guarantee, and the fact that there was no legal framework available in Dubai to deal with a situation that would have been created if a default would have occurred, led to it being paid out in full. With the new insolvency laws in place, a Tribunal in effect, no more Dubai World guarantees in the cards, I can't help but think that the table is set for the Dubai World restructuring to go ahead – Nakheel and Limitless have been singled out. Maybe the Nakheel 10's and 11's get paid out in full, which I don't believe will happen, but it won't be without a similar roller coaster ride to the one we recently experienced. I, for one, could do without the added drama in my life. I would sell those two sukuks into any strength if I owned them. If I didn't, I would stay away. If you are looking for some excitement in your life, I would go with Tamweel. It's off about 15 points during the past couple of weeks and it has been reported that the UAE plans to merge Tamweel and Amlak into a new Islamic bank, which it would capitalize with UAE Federal level funds to double their capital base (AED $5 billion). Getting a commercial banking license is key, because then the funds held at Tamweel would be protected by the Central Bank, the Central Bank, in accordance with their recent statements that provided support for all UAE banks, regardless of their exposure to Dubai World and Nakheel, would be a key ally and, best of all, the UAE Federal Government would be partners with the two lenders in this new venture. If I had to weigh the option of getting involved with Nakheel (no description needed) and a potential UAE bank that is partially funded by the Federal Government, I would pick the latter.
2 comments:
Saad, thanks for your blog. Very useful stuff. I wanted to get your feedback on the brief below. Thanks.
Politics behind Dubai's bailout (Part 1)
The Dubai government confirmed that Abu Dhabi had agreed to provide US$10 billion to help Dubai World meet its obligations, including the Nakheel bond. The remainder of the funds will reportedly be used to meet operating expenses and debt servicing costs till April 2010. The key question is what drove Abu Dhabi’s decision to provide support at the 11th hour; and, more fundamentally, what drove Dubai’s decision to announce its intention to seek a debt standstill.
In terms of the latter, given that they are the majority owners in the troubled corporates, Dubai’s authorities must have known for some time that some of its entities were going to have refinancing problems in the current global/market climate; markets certainly thought things could go belly-up very early on. Despite this, Dubai’s authorities publicly maintained, very aggressively at times, that investors/creditors need not worry. Since the Dubai authorities cannot be assumed to be obtuse or devoid of integrity – they have been dealing with markets/commercial credit for decades and would hence know the deep commercial and political fallout of a default announcement - what drove this public stance?
There are a number of possibilities: (a) face-saving/ego issues: if we stick our head in the sand, the problem will go away, or we cannot stand the shame of being forced to ask others for help; (b) expectations that the global and domestic economy would improve faster than was being projected, as a consequence of which, refinancing needs would become lower; (c) confidence in the ability of Dubai/related-corporates to raise financing on international capital markets or bilateral help (Iran, Saudi Arabia, Kuwait, Qatar or other Arab countries); and/or, barring everything else, (d) confidence in being bailed-out by Abu Dhabi due to the reputational damage Dubai’s failure would have for the UAE as a federation. Since the Dubai authorities waited right till the end to realize that nothing but a debt standstill request would work, some combination of the above possibilities may have been at play.
Working through these questions, being market/creditor-savvy, and aware of financial regulations, the Dubai authorities would have known that being arrogant and ignorant about financial problems will not make them go away – (a) can hence be ruled out.
In terms of (b), this can be discounted simply because the authorities in Dubai would have known that property prices in the emirate are unlikely to recover anytime soon given tight credit conditions (domestically/internationally), negative market sentiments (domestically and globally), and delays in project completion/start (locally and GCC-wide). Further, nearly every commentator was of the opinion that Dubai’s property prices would fall further; hence expectations of being able to secure even lower prices would keep demand from returning. That would keep the real estate sector on edge.
As far as (c) is concerned, although the Dubai government had been successful in raising financing at fairly favourable rates in October, it was unlikely that quasi-sovereign entities with large exposure to real estate (that is, no real net worth) would be able to raise financing except at prohibitively extortionate rates and that too with an explicit sovereign guarantee. Secondly, it was unlikely that market would give the amount of money needed to repay all creditors on time. And in any case, with a dismal outlook for the real estate sector, even if these corporate were able to raise financing, it would simply be postponing the problem for another day: sooner or later, Dubai’s coporates would have to deleverage, and there would not be a better time to initiate this, given a worldwide collapse in asset-price bubbles. Finally, it was unlikely that markets would commit the amounts Dubai needed at the 4 percent they had been able to get from Abu Dhabi.
Part 2:
The above discussion leaves option (d) as the only possibility as to why Dubai chose to announce its intentions on November 25: Dubai always believed that it would ultimately be bailed out by Abu Dhabi simply because of the reputational damage Dubai’s failure would bring to the Al-Nahayan sponsored UAE federation, and what that would imply for the sustainability of the federation going forward; note that it is unlikely that there was a formal agreement between Dubai and Abu Dhabi regarding financial support, since if that were the case, the situation would not have been allowed to reach the proportions it did on November 25. And while it may not have been willing to accept the conditions that came linked with Abu Dhabi support, the severe market reaction led the government to concede.
Dramatically then, at (literally) the 11th hour, the government of Abu Dhabi jumped in, despite the fact that during the time between Dubai’s standstill request and the bailout, anonymous Abu Dhabi public officials had been quoted as saying that support would be on a ‘case by case basis’ – i.e., selective and not blanket. This begs the question as to what persuaded Abu Dhabi to dole out the cash, after remaining eerily quiet while Dubai made audacious statements about having Abu Dhabi’s support, in the aftermath of Dubai’s November 25 announcement and even after Dubai has announced getting support from Abu Dhabi on December 14. There could be several possibilities: the severity of the investor response and its implications for UAE corporate world as a whole forced Abu Dhabi into bailing Dubai out; the recognition that if Abu Dhabi lets Nakheel fall – a strategically important corporate for Dubai – the federation’s future would be at stake – Dubai would pull out of the federation and declare its independence; pressure on Dubai/Abu Dhabi to ensure that such a large sukuk instrument does not fail; and/or, the fear and embarrassment of what would happen if Dubai turned elsewhere for support.
If our line of thinking is correct, Dubai must have approached Abu Dhabi for financial help; it is less likely that Abu Dhabi offered on its own (the text of the press release reads “Abu Dhabi has agreed to”). And in return for providing support, Abu Dhabi may have put some conditions:
Their support will not be blanket – Abu Dhabi cannot be expected to pay for every bad decision Dubai took; put differently, Dubai must bear the brunt of the pain. This would explain why Dubai intends to continue talks on debt restructuring with other creditors. Further, Abu Dhabi could also have insisted that the bail-out funds be first used for companies whose failure would have implications for Abu Dhabi as well given the correlation between intra-emirate property markets, stock markets, and banks.
As the one footing the bill for Dubai’s largesse, Abu Dhabi would also want to ensure that it is not put in this position again. This means that since they are committed to keeping the UAE federation intact, Dubai must also clean up its act. The latter could have financial and political implications. In terms of the former, in return for help, Dubai will ensure leverage within its corporate assets is not built-up to such high levels in the future; in terms of the latter, Dubai will agree to a more dominant role for Abu Dhabi in the federal structure (or that it reign in the liberal lifestyle within the emirate and stop pursuing its seemingly independent foreign policy, particularly in relation to Iran with which Dubai enjoys very close relations). And/or, aAside from Dubai’s commitment to be more financially prudent and accept a dominant Abu Dhabi, the latter could also insist that Dubai ensures that its financial support makes commercial sense: that is, Dubai give-up some of its prized assets/shares in prized assets (DP World, Emirates Airlines, centralization of the stock exchanges).
Post a Comment