A more detailed look at the first big domino to fall, courtesy of Barclays:
DUBAI AND ABU DHABI: AN EMERGING ISLAMIC DEFAULT?
- Today’s news carries a series of unexpected and surprising headlines when the Dubai Government announced that Dubai World will ask creditors for a standstill agreement to extend the maturities of all debt repayments by Dubai World and its property unit Nakheel until May next year. This announcement fundamentally changes our views expressed in our latest notes in November.
- This news emerged minutes after Dubai placed a USD5bn bond equally allocated with the National Bank of Abu Dhabi (NBAD) and Al-Hilal Bank, for an interest rate of 4%. Both banks are majority owned by the Abu Dhabi Investment Council. At the same time, The Dubai Electricity and Water Authority (DEWA) announced that it will be issuing a USD1-2bn new bond in the coming few weeks.
- Today’s statements are relatively confusing and could underestimate market reaction to the broader set of liabilities of UAE entities. In particular, as spreads were widening on the back of an imminent default scenario by the largest bond issuer in Dubai, another Dubai government entity, with significant financing needs was announcing its willingness to issue.
- On the back of today’s developments, we reassess our view towards Dubai as a whole. Fundamentals remain challenging and with uncertainty around the support and political agenda of Abu Dhabi concerning Dubai Inc, spread levels do not seem justified.
- The credibility of Abu Dhabi to support Dubai with respect to its financing needs is dented, in our view, eroding the main pillar of Dubai’s creditworthiness. Dubai’s 5y CDS spreads widened by about 130bp when the news emerged, also sending jitters through wider markets.
- The uncertainty and unpredictability around upcoming debt repayments implied by today’s events will add to pressures on Dubai spreads, which may lead to a re-pricing of Dubai and UAE risk, in our view. For the further financing needs of Dubai, today’s announcements imply an increased dependence on Abu Dhabi, as international investors are likely to be much less receptive to Dubai paper than they have been lately.
- Given the terms of the 2009 bond, Nakheel now has less than five weeks (including the grace period) to put a proposal on the table before the bonds default. There are clearly many question marks as to how this can be restructured and the final outcome would depend on any "voluntary" element and the value that investors are likely to recover. Given the implications that a restructuring is already having on the region (including spread widening across the board and Gulf International Deal pulled from the market) we would expect the Dubai government to keep any restructuring as amicable terms as possible.
- We view the Abu Dhabi government’s credibility with regard to the backing of weaker UAE corporates/quasi-sovereigns as dented and therefore also take a more cautious stance towards these names. We believe that names like Dubai Holdings, Tamweel and, to some extent, Jafza are most likely to be affected. In Abu Dhabi, Mubadala, TDIC and Aldar are likely to be affected as well.
- At the same time, we have already seen the bottom-fishing at the higher quality end of the credit spectrum - including names like DP World, Qatar sovereign and corporates and Abu Dhabi sovereign. In the medium term, we expect these names to continue to benefit from their stronger fundamental profiles, post the repricing.
And for an expanded overview of today's festivities, here is Barclays' Emerging Markets Daily piece.