The regional fixed income markets were weak yesterday, with Dubai related names being hit the hardest, on the back of continued fears that it would be more than just Dubai World that may have to deal with restructuring its debt, when all was said and done. The Nakheel 09's dropped more than 10 percent yesterday, and were bid at a low of 46.5, but closed the day at the 47/49 level. The market on the DIFC Sukuk was 52/57 at the end of the day yesterday – historical lows for that name. The Dubai CDS widened by 8.85% to 544.56, per Bloomberg. Barclays issued a research report with an opinion that "The market is pricing in a swift and orderly restructuring with no lasting effects on Dubai Inc……Based on our recent experience, we would argue that there is little chance of this materializing, and at this point, risk is skewed to the downside." This hardly helped sentiment, and we saw the contagion spread through the region, which resulted in spreads in the ex-Dubai names to also widen.
Istithmar, a part of Dubai World, lost control of the W New York, Union Square, hotel yesterday in a foreclosure auction. The hotel was purchased by Isthithmar in 2006 for $285 million. LEM, an affiliate of Lubert-Adler Real Estate Funds, bought out the debt on the hotel for a reported $2 million, effectively taking control of the property.
It was announced that Dubai Group, one of Sheikh Mohammed's investment vehicles, is looking to divest a $91 million position (DG owns 25%, and this sale would reduce their position to 20%) in EFG-Hermes, the largest publicly traded investment bank in the region. They are looking to sell their stake at a discount of up to almost 11% to yesterday's close.
DEWA news – The flurry of downgrades in Dubai has caused ripples that will have an effect into Dubai entities that would otherwise have been perceived as being healthy, viable businesses. DEWA has a $ 2 billion securitization program in place (in addition to a AED 3.2 billion sukuk which matures in 2013), under the name of Thor Asset Purchase Company, which issued notes in two tranches of $1 billion each, back in 2007 and 2008. DEWA is Dubai's only provider of utility services, and the notes issued under this program have an unconditional guarantee from the Government of Dubai – the Dubai DOF has been quoted as saying, "DEWA is a government company. Its debt is sovereign and the government remains 100% committed to meeting its sovereign debt obligations."
What has occurred over the past couple of days is that Dubai GRE's have been downgraded to sub-investment grade levels (see yesterday's afternoon note for details), with DEWA being downgraded by Fitch and finally by Moody's yesterday. Fitch's downgrade on November 30th to below the single A grade (it is still investment grade at Fitch) triggered an accelerated payment clause which may result in DEWA having to repay the holders of these notes on December 14, 2009. Moody's moved DEWA to Ba2 from Baa2, which is officially "junk bond" status and cited "liquidity pressure due to the triggering of an acceleration clause" as the reason for the downgrade. There are reportedly three holders of these notes and all are said to be interested in waiving the acceleration, which leads me to think that they are most likely local banks. I was speaking with an accountant earlier today about further impairment charges that may have to be realized or provisioning that may have to be made by banks holding the Thor Asset Purchase notes, and he is of the opinion that there would likely have to be some provisioning issues, because the notes become current due to the trigger and a substantial change in terms/risk.
I think it's evident that I love my before and after comp. tables, and after the sell off yesterday, I wanted to provide an update on how some of the bonds that are perceived to be of higher quality within the region, Ex-Dubai, are faring. Again, I will use the morning of the 25th as a point when it was the quiet before the storm and compare to yesterday's close. I have highlighted those names that have seen yields expand in excess of 30 bps.
Issue | Offer Yield - November 25th AM | Offer Yield - COB December 8th | Yield Expansion |
Abu Dhabi Sovereign 12 | 2.65 | 3.02 | 37.00 |
Abu Dhabi Sovereign 14 | 3.8 | 3.97 | 17.00 |
Abu Dhabi Sovereign 19 | 5.25 | 5.28 | 3.00 |
Mubadala 14 | 3.81 | 4.18 | 37.00 |
Mubadala 19 | 5.88 | 6.1 | 22.00 |
TDIC Finance | 4.37 | 5.14 | 77.00 |
TDIC Sukuk | 4.21 | 5.06 | 85.00 |
Taqa 6.6 13 | 4.15 | 4.85 | 70.00 |
Taqa 14 | 4.52 | 4.87 | 35.00 |
Taqa 19 | 5.78 | 6.18 | 40.00 |
CBB 14 Sukuk | 4.07 | 4.40 | 33.00 |
Qatar 14 | 3.62 | 3.71 | 9.00 |
Qatar 15 | 3.73 | 4 | 27.00 |
Qatar 19 | 5.00 | 5.09 | 9.00 |
Qatar 20 | 5.06 | 5.12 | 6.00 |
QTEL 14 | 4.20 | 4.46 | 26.00 |
QTEL 19 | 5.73 | 5.87 | 14.00 |
RASGAS 5.5 14 | 3.92 | 4.11 | 19.00 |
I believe we will see continued pressure on the regional bond markets, as this DEWA news picks up steam, and until there is more clarity, I would likely stay on the sidelines, as there is more risk to the downside. I would keep my eyes on the aforementioned names in the event that spreads widen dramatically, and then be opportunistic.
4 comments:
Saad, I just discovered your blog and thanks for the interesting thread of comments on the Nakheel Sukuk Dec-09 standstill.
One issue that I think that the media has not picked up was Nakheel's repayment in mid-October of a AED 4.4 billion securitised bond, which was quietly paid one month ahead of schedule. I was puzzled by why Dubai World/Dubai Government did not make a big noise about the repayment, and why did it bother to repay one month ahead of schedule, even before the Dubai issuance of late October.
With hindsight this looks like creditor preference on behalf of Nakheel and Dubai World. The creditors were reported by MEED to be Emirates NBD, Mashreqbank, Noor Islamic Bank and Samba from Saudi Arabia. So these creditors, in some of which the Dubai Government has an interest, were repaid, while the Dec-09 Sukuk holders were not. In the UK this would definitely create a problem for Nakheel's management because you cannot benefit some creditors at the expense of others when you know you may have bankruptcy problems. I wonder since the Co-obligor guarantees and the Dubai World guarantee are subject to English law if the certificateholders have any potential actions against Nakheel or Dubai World's management. They cannot seriously argue that in six weeks they have suddenly discovered that they could not repay the Dec-09 Sukuk.
This just undermines the credibility of Dubai.
By the way, the Deutsche Bank Chief Executive's comments that it would be a "fruitess exercise" for creditors to take the Dubai Government to court is highly inappropriate given Deutsche Bank's role as transaction administrator in the Sukuk deal.
Saad
Very interesting post - which I've linked on my blog.
One quesion though, I had understood from the Offering Circular for its sukuk issued in June 08 that DEWA is not sovereign. I can't seem to post the link but the OC is available on NasdaqDubai's website.
Aonymous - Thanks a lot for your comment. If you would email me your contact details, I will be happy to give you a call and share my views.
Abu Arqala - Thank you for your comment. I had a similar understanding on the sukuk, with regards to the explicit guarantee. I believe it was the MTN's issued under the "THOR" banner that came with that guarantee. The comments that I have read in the press clearly do point to some sort of Sovereign tie in for DEWA, however. I could be mistaken. Would you please provide a link to your blog? All the best.
Saad
Looks like my original reply to yours above got lost in cyberspace.
My blog is suqalmal.blogspot.com
Best
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