Wednesday, October 6, 2010

Dubai’s Back: CD Spreads Down But …

富士山- 5 合目

There have been numerous stories in the press how Dubai is making progress coming back. The conclusion of the Dubai World restructuring agreement and the issuance of the sovereign bond are touted as a watershed in this process.

That's not to say that there is no progress, but that it's a bit premature to declare success.

I'm planning a post on the bond later. Today I'd like to turn to the CDS spreads.

What we are told is that there has been a remarkable compression in CDS spreads which touched 650 or 660 bps, if I remember correctly, at the height of the crisis. The spreads are now down to pre-crisis levels, though pre-crisis is measured as the spread just before the announcement.

There's an apparent fallacy in that statement.  Prior to Dubai's November announcement, its spreads were not in some "golden age" except when compared to the market reaction post announcement. And a lot of that was over reaction due to the market being one-sided (a preponderance of demand for protection over the supply of protection) coupled with the fact that the CDS market is rather thin on the best of days. And even thinner the further one's obligor from the major markets.

There is a tendency among some to imagine that credit is like a light switch. It's either good (on) or bad (off). That's not the case.  There are gradations and usually (but not always) credit improvement or deterioration takes place over time.

Prior to the DW announcement, Dubai's CDS spreads had been trending larger, reflecting deterioration in its credit.

As an illustration, let's take a look at some very easily accessible data on five-year CDS spreads from Markaz. You won't need a Bloomberg for this.

Saudi Arabia80.2
Abu Dhabi106.4

As indicated above, there are a lot of factors besides credit that affect the spreads. But I think this gives a relatively good idea of where the market sees Dubai's credit. And one would expect Dubai to be higher in the ranking.

So progress has been made. But … there's a longer way to go as indicated in the picture above.  And if you got to the Fifth Station on the bus as many do, your most strenuous efforts are yet to come.  Such is the case with Dubai.


laocowboy2 said...

Too many debt "standstills" and "extensions" still out there (never mond the actual restructurings) for any serious credibility.

Abu 'Arqala said...


You are of course correct from a fact-based standpoint.

But sadly the affairs of the world are not run on a fact-based basis.

"Wise" investors have bought US$1.25 billion of Dubai bonds (those these were IPO style priced to give a nice kick to investors). An amount which is but a proverbial spit in the ocean in terms of the total quantum of debt.

CDS spreads are down (the initial spike having subsided).

Bankers' and investors' ADD will eventually reassert themselves particularly as the restructurings are agreed. As they will be.

Lending won't be at the old levels and with such carefree abandon.

Now all they've got to do is manage the real estate situation - to keep any bad news under wraps.

On that score, thanks for the NYT article. A post is coming.