DUBAI—Investors sold banking stocks across Europe and Asia and jacked up the price of insuring against Dubai defaults, a day after the government said it would take charge of restructuring its corporate flagship, Dubai World, and asked creditors to accept delayed payments.
A Wednesday announcement of a six-month standstill in debt payments took investors and analysts by surprise. It followed months of positive moves and comments from government officials suggesting Dubai and the federal government of the United Arab Emirates were willing to step in to plug financing holes.
“The most negative effect of [the] announcement is a major shock to confidence in the U.A.E. and the region more generally,” said Richard Fox, a credit analyst at Fitch Ratings in London. “People will now question government support.”
Amid a scramble by international bankers and analysts to assess global exposure to Dubai, the company said Thursday that its cash-generating ports division, DP World, wouldn’t be included in the restructuring.
Company executives and representatives didn’t respond to requests for comment. Sheik Ahmed bin Saeed al Maktoum, head of Dubai’s finance committee, said in a statement Thursday that “our intervention in Dubai World was carefully planned and reflects its specific financial position,” according to Zawya Dow Jones. “We understand the concerns of the market and the creditors in particular. However, we have had to intervene because of the need to take decisive action to address its particular debt burden,” he said, promising more details next week.
European and Asian stock markets fell, weighed down partly by concerns about bank exposure to Dubai. Markets were closed across the Persian Gulf for Eid holiday, and in the U.S. for Thanksgiving. The pan-European Dow Jones Stoxx 600 index fell 3.3%, while London’s FTSE 100 index was down 3.2%. The U.S. dollar rebounded after slumping in Asia, as investors flocked to the currency as a haven.
Dubai’s standstill request is one more troubling development for international banks, which turned in recent years to the oil-rich Middle East as a source of income. Both local and international banks also are licking their wounds from the debt troubles this year of two big family-run Saudi Arabian conglomerates, which owe more than 100 lenders a conservatively estimated $15 billion.
Dubai World is seeking a six-month moratorium on interest payments, a person familiar with the matter said. During that time, it could negotiate with creditors a restructuring that would pare liabilities, which include $20 billion of loans and bonds coming due in the next 18 months, according to estimates. If the lenders don’t agree, Dubai World will default on the notes, the person said.
The banks with the greatest exposure to Dubai World are Abu Dhabi Commercial Bank and Emirate NBD PJSC, people familiar with the matter said. Executives at the two banks weren’t available for comment Thursday.
Among the international banks that have large exposure are the U.K.’s Royal Bank of Scotland Group PLC, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Standard Chartered PLC and ING Groep NV of the Netherlands, the person said.
RBS has lent roughly $1 billion to Dubai World, another person said.
Dubai World Bond Values Plunge As Investors Fear ContagionBonds of Dubai World’s real-estate subsidiary plunged in value Thursday, a day after the troubled Gulf city-state rattled investors throughout Europe’s financial markets by delaying the state-run conglomerate’s debt payments.
Roughly $3.5 billion of Islamic bonds, called sukuk, from Dubai World real-estate subsidiary Nakheel dropped from around 110 cents on the dollar before the news Wednesday to around 70 cents, in a sign Dubai’s decision caught investors completely off guard. The bonds are due to mature December 14.
European stock markets also fell sharply in the wake of the Dubai World news, with investors fretting over the possibility of losses for European banks exposed to Dubai.
Nakheel bond holders sought legal advice Thursday on their options, including whether they could seize some assets.
Significant bond holders include QVT Financial LP, a New York-based hedge fund which manages about $8 billion in total assets, according to people familiar with the matter. Other recent holders of Nakheel bonds include money managers BlackRock Inc., of New York, and London’s Ashmore Group PLC, according to holdings disclosed on Bloomberg. BlackRock and Ashmore declined to comment.
The question now: Why were holders of Nakheel’s bonds surprised?
For months, investors have harbored concerns about Dubai, one of seven semiautonomous emirates that make up the United Arab Emirates. After years of riding the credit boom, Dubai is struggling to overcome an economic crisis triggered by the collapse of its real-estate sector.
Investor complacency amid the global economic recovery may partly explain the rude surprise. But a deeper reason is that investors may have mistakenly assumed that recent emergency support coming from the broader United Arab Emirates would ensure Dubai would pay all its obligations on time.
The new fear: Any help from Dubai’s oil-rich neighbor, Abu Dhabi, may be used to help Dubai, but not its state-run corporate entities.
“I think people made the linkages they wanted to make,” says Jeremy Brewin, head of emerging-market debt at Aviva Investors in London. “We need to distinguish between sovereign and “sub”-sovereign debt.”
Local Newspapers are ignoring the problem. One, Gulf News, has a headline on its Business Page of “Investors show trust in Dubai!” Let us see: Nakheel bonds (in which I am indirectly invested) dropped 40% and that is a show of trust??
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