Monday, December 14, 2009

Abu Dhabi Provided $10 Billion To Bails Out Dubai World

. Monday, December 14, 2009

By stockOzone team

Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, meet its obligations, including $4.1 billion needed to repay an Islamic bond maturing today for the real-estate unit Nakheel PJSC.

Dubai will use the rest of the money to pay Dubai World’s contractors, suppliers, interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai’s government said in an e-mailed statement today. “This support provides funding and a stable basis for the restructuring process, which continues,” Dubai World said in a separate e-mailed statement.

Dubai shares surged the most in 14 months, and Asian stocks and U.S. index futures rebounded from losses on optimism that the emirate’s debt problems won’t spread to other emerging markets. Dubai World said Dec. 1 it’s seeking to restructure $26 billion of debt, less than half the $59 billion of liabilities it had at the end of 2008.

“It comes as a relief for the market, underpinning hopes that the implicit government support for Dubai corporate issuance is intact,” said Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. “Whilst we are not out of the woods yet, it is definitely a step in the right direction.”

Dubai Shares Jump
Dubai’s benchmark share index added 10 percent, the most since October 2008, to 1,866.82 at 10:04 a.m. in the emirate. The measure had lost 19 percent since Dubai World on Nov. 25 sought a “standstill” agreement on its debt. Abu Dhabi’s measure climbed 6.1 percent. The MSCI Asia Pacific Index rose 0.6 percent to 120.37 at 4:20 p.m. in Tokyo. Futures on the Standard & Poor’s 500 Index rose 0.8 percent.

“The fund injection gives some leeway to Dubai World to put together an orderly debt restructuring plan as it tries to alter its debt profile,” said Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd.

The cost of protecting against Dubai defaulting on its government debt plunged 32 percent, with credit-default swap contracts falling 175 basis points to 375 basis points, according to National Australia Bank Ltd. prices.

While Dubai’s government owns 100 percent of Dubai World, it hasn’t guaranteed the company’s debt and creditors must help it restructure, Abdulrahman Al Saleh, director general of Dubai’s Department of Finance, said Nov. 30.

Nakheel Loss
Nakheel, which is building palm tree-shaped islands off the emirate’s coast, posted a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property.

Nakheel’s repayment of the $3.52 billion bond was the biggest debt obligation for a Dubai entity since global credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc. Nakheel accumulated debt during a six- year real-estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies $70 billion to help diversify the economy.

Nakheel’s 2009 sukuk redeems at 115.52 cents, increasing the total payment to $4.1 billion. The amount includes a 6 percent premium to bondholders because the company didn’t do an initial public offering during the life of the bond, and the remaining part of the annual coupon.

Nakheel Bond Speculation
Nakheel’s bond had surged 18 percent in the last two trading days to 53 cents on the dollar, according to Citigroup Inc. prices, on speculation the developer will seek to avoid a default. They traded as low as 45 cents on Dec. 9.

Dubai’s government will also announce a “comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection,” according to the statement. “This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.”

Islamic bonds, known as sukuk, are governed by Shariah laws barring investors from profiting from the exchange of money.

Disclosure: Author does not own any of the stocks discussed here.

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