Quantifying External UAE And Dubai Loss Exposure
Bank of America has provided an extended analysis of foreign exposure to Dubai World and Dubai sovereign. As BofAML points out "the basics of the discussion are threefold in our view: who owes how much to whom, when do they pay, and what happens if they do not? As there are no official debt data on both emirates and federal level, we used the outstanding loan and bond information on the SDC debt database and Bloomberg to estimate Dubai and UAE’s debt burden. We estimate that UAE’s total debt amounts to US$184bn as on end 2009, US$88bn of which belongs to Dubai. Abu Dhabi accounts for US$90bn and the other emirates hold the remaining US$5.6bn. Note that the debt service will be higher as our numbers only include the principal payments." The expectation is that Abu Dhabi will bail out Dubai as moral hazard becomes a sovereign issue. We don't think this is too likely: we believe the "saviour" will likely emerge from a bank that has access to the Fed's or the BOE's money printing machine either directly or indirectly as the Bernanke cartel does not care if his policy to bail any and all risk exposure remains domestic or finally has that much deserved and anticipated world tour.
Here are the facts:
Upcoming scheduled debt redemptions are a major concern for UAE and for Dubai in particular - "Dubai faces almost US$50bn of debt amortization in the next three years: US$12bn in 2010, US$19bn in 2011 and US$18bn in 2012. We estimate the total debt for Dubai World as US$26.5bn, 80% of which needs to be paid back in the next three years. The restructuring is likely to make the new issuances for UAE much harder in the short-term and the implicit Abu Dhabi support is no longer taken for granted. Hence, we expect a further pressure on the banking sector."
At the direct exposure level, and as Zero Hedge pointed out yesterday, the two issuers most at risk seem to be HSBC and STANLN. Bank of America, which has an Overweight 30% rating on both firms, believes the HSBC troubles are overblown. We have not checked, but we are fairly confident BofA did not think HSBC had much subprime exposure in 2007 either. Yet the CEO-less Merrill savior is less sanguine on Standard Chartered: "At Standard Chartered, our Equity colleagues estimate that wholesale lending in the UAE accounts for c.50% (or USD7bn) of this issuer’s exposure to wholesale lending in Middle East & South Asia. This equates to 4% of loans or almost 30% of total equity." Yes, that's 30% of total equity, and that's a downside estimate. The next question is who has exposure to Standard Chartered, and who has exposure to those so exposed, and so on. Hopefully AIG is not at the end of the sequence. What is certain is that Goldman has already likely bought an asston(ne) of CDS against whoever the most responsible and risky counterparty is in this exponentially leveraged risk chain.
Below is BAC's estimate of Dubai World and Nakheel loan holders:
And here are the individual loans made to Dubai World. Now is the time to open that 401(k) and make sure that none of these names should be familiar to you.