Tuesday, October 26, 2010

Dubai CDS Still of Interest

Bloomberg reported:

Dubai World in September reached an agreement with creditors to repay debt over five and eight years to allow asset prices to recover as it seeks to maximize the value of its investments. Dubai Holding LLC, which controls Dubai Group and Dubai International, said it aims to reach a similar deal with lenders.
This explains the ongoing interest in Dubai CDS amongst PEU Report readers. Lebanon's Daily Star reported:

Dubai’s debt mountain now totals about $115 billion, meaning the emirate’s flagship firms are likely to be forced into further restructurings and asset sales, according to a Reuters poll of economists and investors.

Dubai’s five-year credit default swaps (CDS), the cost of insuring the emirate’s debt against default, were trading at 385 bps on Wednesday (Oct. 13), down from around 634 points in February, reflecting improving investor confidence.

State-owned firms owe more than $100 billion to creditors, including $30 billion due to mature in 2011-12.

A recently released IMF report spoke to the CDS issue in the Middle East.  It stated:

"Since the summer of 2008, credit default swap (CDS) spreads for GCC sovereigns have generally fallen by 50180 basis points," it said, with Dubai, understandably being the exception. 
The IMF had more to say on the completed restructuring.  According to Zawya:

IMF also said that banks accepted to take a haircut on their loans of $14.4 billion to Dubai World, by extending maturities to 2015 and 2018 at below market rates. Nakheel's loans would be rolled over at market rates.

IMF also said that the government of Dubai's cash injection will allow Nakheel to complete ongoing projects.

The orderly sale of these properties until 2018 is projected to generate enough cash to repay the restructured loans at maturity.

IMF also warned that Dubai faces short-term challenges, while the government of Abu Dhabi has substantial fiscal buffers.

I  take it uncompleted restructurings fall into the short-term challenge category.

Carlyle Group co-founder David Rubenstein said his firm poked around possible Dubai sales.  Rubenstein's other favored method?  Buying distressed debt and getting an equity stake from any default.  It would be difficult for Carlyle to play hardball with Dubai Holding, given their 7.5% ownership by Mubadala Development Co, another UAE sovereign wealth fund.  Might any private equity underwriters have employed Rubenstein's strategy?