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Nakheel Sukuk Unlikely To Be Repaid, Dubai Banks To Be Impaired, Likely Need More Bailouts

Tyler Durden's picture


Reuters reports that hopes of a Nakheel pay down in whole or in part are getting increasingly illusory. The $980 million Nakheel issue maturing on May 13, which had initially been rumored to be paid off in full (at about the time PIMCO was selling it after buying it up in the sub 50 cent range), then at 60, now seems will not get any consideration at all. Reuters quotes a source as saying "It is very unlikely that the bond will be paid off. Incredibly unlikely." Of course, now that M&A rumors don't exist per se, as it is all really just SEC-endorsed insider trading, the rumor mongering has focused on Dubai and Greece, which leads us to believe that this is simply some Nakheel short talking up (or down, as the case may be) their book.

More from Reuters:

Dubai World which is in talks
to restructure some $22 billion debt, is unlikely to pay off developer
Nakheel's $980 million Islamic bond, a source familiar with the matter
said on Monday, and all options are open.

The person, who spoke on condition of anonymity, said all options are on the table for the issue which comes due May 13.

That includes offering new paper for existing debt or, if needed, administration.

In the off case that this is more than mere rumors, the implications for the region, and Dubai's banking sector in particular would be severe. Earlier today Moody's came out with a piece titled: "Dubai World Restructuring Delay Increases Dubai Bank Credit Quality Uncertainty." The conclusion: things are about to get worse if there is no arrangement prior to May, and much worse if a free fall bankruptcy (however that may be defined under Sharia law) eventually transpires.

From the Moody's report:

On 14 February, the Dubai Department of Finance said neither the Dubai government nor Dubai World Group (DWG) had made an offer to creditors on the latter's debt restructuring plan. The statement was made to dispel rumors that a 40% loss had been proposed to creditor banks, which raised investor concerns and caused Dubai government’s CDS spreads to widen to November crisis levels. According to our estimates, however, even if a 40% loss on Dubai World loans were taken, UAE banks would incur losses amounting to only around 9% of their capitalization as of year-end 2009. (The 9% takes into account the exposures to DWG subject to restructuring.) This would hurt 2010 profits, but not jeopardize solvency.

As the DWG restructuring saga remains unresolved, market participants will continue to assume the worst, adding to the costs the affected banks may bear from potential write-offs. Although very few banks in the UAE have publicly disclosed their actual exposures to DWG entities, we have received sufficient information from most rated banks to conclude that the overall exposures of domestic banks to DWG entities are in the vicinity of AED55 billion, or $15 billion.

We rate 13 banks in the UAE covering loan market share of around 85%. Although the concentration to DWG does differ significantly from bank to bank, we have run the stress scenarios with various haircuts, and conclude the following:

  • None of the rated banks is expected to be in breach of the minimum 8% regulatory Tier 1 ratio, even in the case of a 40% haircut loss on its DWG exposures.
  • Typically, Dubai-based banks are more exposed to DWG than banks from other emirates, though there are a few exceptions.
  • In the case of a 40% haircut, some banks will see their Tier 1 capital ratio fall below 11%, which is the minimum benchmark ratio set by the Ministry of Finance (MoF) as part of the conversion of the MoF’s deposits into Tier 2 loans. The implication is that the MoF may have the option to convert its Tier 2 loans into Tier 1 capital securities.

UAE banks are in position to weather sizeable haircuts, if that is what happens. Dubai banks, on the other hand,  are exposed to other government-related issuers that may come under stress. Similar haircuts to other Dubai government-owned businesses, and possibly the private sector as well, could have serious repercussions. However, there is no indication that such an event is forthcoming.

Moreover, a potential haircut loss could harm the ability of banks (especially Dubai-based banks) to tap the debt capital markets in a cost-effective manner without federal guarantees. Liquidity in the system is currently good and the liquidity facilities provided by the UAE Central Bank have not been much utilized



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Mon, 02/22/2010 - 12:40 | Link to Comment John McCloy
John McCloy's picture

China is absolutely not as healthy as they appear to be. The only nation more proficient at supressing information, facts and data than the U.S. is China. I am suprised more are not taking note of their "lending curbs". I believe their housing and banking system is about to have a significant crisis and they know it.

As if they needed enough of a motive not to buy our bonds soon they will have an additional reason and excuse for bowing out. The China "Growth explosion" was one of the greatest myths perpetuated in the history of global finance. They are not communist simply in name. Chanos is 100% correct. How can China flourish when their entire economy is reliant upon the over consumption of Americans?

Mon, 02/22/2010 - 12:50 | Link to Comment Anonymous
Mon, 02/22/2010 - 13:19 | Link to Comment alexdg
alexdg's picture

Correct, for the last 2 years it has been on dependent on Government stimulus creating even more useless factories, hi-speed railways and office buildings.

Tue, 02/23/2010 - 00:47 | Link to Comment Anonymous
Mon, 02/22/2010 - 12:52 | Link to Comment Going Down
Going Down's picture


PIMCO? Did I hear Pimpco?


Feb. 22 (Bloomberg) -- The U.S. Supreme Court rejected an appeal by Pacific Investment Management Co., clearing the way for a lawsuit seeking more than $600 million for the company’s alleged manipulation of the price of Treasury futures contracts on the Chicago Board of Trade.


Mon, 02/22/2010 - 12:56 | Link to Comment BlackBeard
BlackBeard's picture


"Sukuk" tee hee hee....


Mon, 02/22/2010 - 12:58 | Link to Comment Anonymous
Mon, 02/22/2010 - 13:01 | Link to Comment ratava
ratava's picture

Sort of like Euros talking down the Euro innit.

Mon, 02/22/2010 - 13:20 | Link to Comment deadhead
deadhead's picture

There is no problem

Bernanke will buy all of Dubai's paper.

Bernanke will buy every single phucking Greece bond.

As well as those from Italy, Ireland, Portugal, Spain and the UK.

Then, Bernanke will buy another 500 billion of US Treasuries.

Bernanke will top it off with some dessert by buying yet another 5 or 10% stake in WFC, BAC, JPM, STI, RF, KEY, FITB, HBAN, USB etc etc ad infinitum.


In fact, if you have anything you would like to sell, just call up Bernanke and he will buy it.

Mon, 02/22/2010 - 13:53 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

I am surprised why we even have these so-called "corrections" in all the markets anymore. Seriously though, the present batch of humans is probably the stupidest in our race's history. Even after announcing massive-money-printing-out-of-thin-air/"QE" operations there has been no buying panic for Gold or any other worthwhile real assets (no, junker stocks don't fall in the worthwhile category).

Mon, 02/22/2010 - 14:01 | Link to Comment Mr Lennon Hendrix
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yeah...right?  stupidest....most likely.  Most complacent ever?  Without a doubt.

Mon, 02/22/2010 - 14:24 | Link to Comment msorense
msorense's picture

That's right.  No wonder Warren Buffet said he would sell if Ben Bananake was not reappointed.  Clearly the famed "value investor" is not investing in bank stocks because they have value in the free market.  Without the Bernanke Put his fortune would be nothing put a pile of paper. 

I share your frustration with the bullshit, after almost a solid year it is becoming too much to bear.

Mon, 02/22/2010 - 13:55 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

This is boring like a soap now.  "Greece is a problem, wait no the doelarr is a problem, no wait Dubai is a problem, ok it is the euro, wait china is a problem, japan is in deflation, Britain is in inflation, Detroit California and New York.............."  ALL PROBLEMS!  I woke up to this 2 years ago, it is the same play.  Luckily, intermission is almost here, followed by the famed "Inflation" and "Hyperinflation" acts where the "people" hunt for Greenspan and BS and ask some REAL questions.

The Federal Governments and PRIVATELY run Central Banks are massaging your wealth away with inflation.  WAKE UP!

Currencies will stay in this range for a month, until America falls flat.  Once it is realized by the status quo that nobody can pay for anything and the banks spent the tax stimulus monies on the broken mortgage payments, hell will brake loose.  Then the doelarr will be taken off of the Xross.  They want the Phoenix to rise; a G7 currency.  This will happen in 2012.

Mon, 02/22/2010 - 13:59 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Complaining about shitty little states like Dubai and Greece in the face of the world's biggest economy's complete and total bankruptcy is like complaining about somebody spilling water on your dress when the whole damn Titanic is sinking.

Mon, 02/22/2010 - 14:00 | Link to Comment Mr Lennon Hendrix
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Mon, 02/22/2010 - 14:18 | Link to Comment Onehunglow
Onehunglow's picture


Just like a magician. Got you watching the right hand while the left hand is doing all the work. Majority of the sheep are too stupid to realize this. Meanwhile the flock gets fleeced.

Mon, 02/22/2010 - 15:16 | Link to Comment omi
omi's picture

I thought insider trading in bonds is fine.

Mon, 02/22/2010 - 21:00 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

The Black Swan is a sucker's problem.

Also, if interested you can read the May 18th, 1931 NYT article on Kreditanstalt. 

Merrily we rhyme along...

'Something here does not add up. Why would Dubai risk such damage to its reputation when the recovery of its still viable entrepôt model depends on the confidence of the capital markets?'

Sat, 04/17/2010 - 10:41 | Link to Comment Tom123456
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