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