Thursday, November 26, 2009

Dubai World Delays Debt Payment

Bloomberg reported:
Dubai World, the government investment company burdened by $59 billion of liabilities, roiled markets around the world yesterday by seeking to delay repayment on much of its debt.
Outside the U.S. debt restructuring triggers credit default swaps.

The Dubai announcement drove up the cost of protecting emerging-market sovereign debt against default. Credit-default swaps tied to debt sold by Dubai rose as much as 131 basis points to 571 according to CMA DataVision. Contracts linked to Saudi Arabia climbed 18 to 108, while Bahrain rose 30.5 to 225, CMA prices show. Debt swaps linked to Abu Dhabi government bonds increased 18.5 to 155, Vietnam rose 39 to 252, Indonesia climbed 27 to 229 and Russia added 13 to 205.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

An Abu Dhabi sovereign wealth fund (SWF) owns 7.5% of The Carlyle Group. They purchased their chunk in 2007, in the midst of a worldwide investment spree by private equity underwriters (PEU's) & SWF's.

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the global recession. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG. Banks around the world have written off more than $1.7 trillion as the credit crisis trashed the value of their assets.

Swaps linked to Mubadala Development Co., a government-backed investor that announced an $8 billion joint venture with General Electric Co. last year, rose 111 basis points to 247, according to CMA.
Mubadala Development is Carlyle's 7.5% owner. Who's at risk from from the Dubai World debt service failure?

Dubai World’s lenders include Credit Suisse Group AG, HSBC Holdings Plc, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, according to a person familiar with the situation.

The result of the latest shakedown in global financial markets?

European stocks fell the most in seven months and bonds jumped as Dubai’s attempt to reschedule its debt rattled investors seeking higher returns in emerging markets. The dollar slid to a 14-year low against the yen.
A different Bloomberg article stated:

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages $2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”

Dubai World’s assets range from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered Plc and luxury retailer Barneys New York through asset-management firm Istithmar PJSC. The Dubai government’s attempt to reschedule debt triggered declines in stocks worldwide that had been rebounding from the worst financial crisis since the Great Depression.

Recall private equity and sovereign funds being the world savior from infrastructure to banking? The Obama administration is counting on PEU's & SWF's. Ask Tim Geithner, Ray LaHood, Arnie Duncan, Rahm Emanuel, Larry Summers or David Axelrod. They'll call Dubai World a "one off," an isolated event. It's not.

“It’s very important to resolve this in a way that will minimize contagion across the region,” Matrix Group’s Loftus said.
This is not good news on Thanksgiving. However, in PEU like fashion, Dubai World will ring fence its best assets from creditors. Never the less, the market hates surprises.