Major UAE Banks Have Rengotiated AED15 Billion (US$4.1 Bn) in Loans - Signs of Writeoffs to Come?

The National reports that three of the UAE's largest banks have renegotiated some AED15 billion in loans.  To be clear this is the stock of renegotiated loans as of 31 December 2009.

1. EmiratesNBD - AED7.8 billion in 2009 on top of an existing AED2.5 billion.
2. NBAD - AED3.2 billion
3. First Gulf Bank - AED2.5 billion

Some comments.

1. It's common practice for a bank to renegotiate a loan with a client if the client cannot fulfill the original terms.  This is often the smartest thing to do.  Court windups are costly - both in terms of time and ultimate recovery.  No more so that in the UAE which has one of the worst insolvency regimes in the region.  The goal of any banker is to get back as much of the contractual amount due as is possible.
2. Under IFRS loans are included in the "renegotiated" category if a material change has been made that is a concession the Bank would normally not make or terms of the loan have been amended.  So for example if the interest rate has been reduced.  Or if changes have been made in repayment schedules - extension of maturities.   So some changes may not reflect fundamental credit weakness in terms of ultimate repayment but a bit of slack - a lower interest rate, an extra six months for repayment.
3. That being said, can renegotiations be used to push problems into the future?  Yes.  Do banks sometimes do this?  Yes.   
4. Looking at NBAD's 2009 financials (Note 4), they have classified roughly AED557 million of the AED3.183 billion of renegotiated loans as "OLEM"  which means weak  or watch credits.  Those monitoring  the health of NBAD would want to keep an eye on the OLEM category which has gone from AED454 million at FYE08 to AED3.3 billion.  "Non Pass" loans were AED3.0 billion at FYE 2008 and AED2.3 billion at FYE 2009.  An improvement not only in amount but as well in allocation among the classifications.
5. Looking at FGB's financials (Note 32.2), renegotiated loans were AED836 million at FYE08 increasing to AED2.456 billion at FYE 09.  FGB's watch loans increased to AED1.2 billion from AED0.8billion.  There has also been a fairly dramatic rise in the amount of "non pass" loans (= weaker credits) from roughly AED3.5 billion to AED6.3 billion. 
6. Therefore, I think that when looking for potential future problems, the OLEM or "Watch" category  is probably the best early warning indicator, followed by a close eye on the movement in renegotiated credits.

"Mastermind" Attempts to Defraud UAE Central Bank

A thoroughly engaging story of an Asian "mastermind" who attempted to defraud the Central Bank of the UAE.

I remember watching Mastermind India on the TV.   Sid Basu.  The Hot Seat.  Your time starts now!   Even the losers were formidable.

Nothing like this story. 

I think the appropriate reference is "The Weakest Link".

Borse Dubai - More on US$2.5 Billion Loan and Its Implications

A slip at Suq Al Mal.  In my last post I didn't deal with the background to the US$2.5 billion  loan.  And its potential implications. 

As I like to say, often the details of the story are more or equally interesting  as the story itself.  I should pay more attention to what I say.

With that as background, here goes.

First, where did this loan come from?

In 2007 both Nasdaq and BD submitted bids for OMX, the Swedish exchange.  BD topped Nasdaq's US$3.8 billion bid with one of its own for US$4.0 billion.  Subsequent negotiations among the parties led to BD and Nasdaq agreeing a strategic partnership.   BD was to sell the shares it had acquired in OMX to Nasdaq while at the same time purchasing from Nasdaq some of its shares in the London Stock Exchange and taking an interest in Nasdax/OMX.  When the dust settled, BD owned 19.9% of Nasdaq OMX and 22.2% of the LSE.  Nasdaq acquired OMX.

To finance the deal, BD incurred obligations (which included a guarantee facility) in the aggregate amount of US$3.8 billion equivalent. 

In February 2009, BD announced it had successfully raised US$2.5 billion to refinance these earlier facilities.  At the time this was touted as a sign that credit was available to Dubai Government linked entities, even though on less favorable terms than earlier.

How successful was the US$2.5 billion refinancing?

The earlier financing was multi-year and carried interest rates between 0.7% and 1.3% per annum.

The new financing was at 3.25% per annum (roughly 2.5X taking the maximum margin on the old facility).  The tenor of the new facility was for one year as opposed to the multi-year tenor on the previous.  Though the new loan gave BD the option to extend the loan another year.

Even with the higher margin and shorter tenor, the refinancing was only completed because government owned banks in the UAE joined the deal.

The participating banks included Bank of Baroda, Dubai Islamic Bank, Emirates Bank International, HSBC, Industrial and Commercial Bank of China (Asia) Limited, ING Bank London Branch, Intesa Sanpaolo Dubai Branch, National Bank of Abu Dhabi, Skandinaviska Enskilda Banken, The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Union National Bank. 

What does the recent extension of maturity tell us about the acceptability of Dubai Inc credit in the market?

The cost of BD exercising its option was 0.75% of the loan amount.   I'm guessing this was paid up front.  This effectively represents an increase in the margin to 4%.  (Technically, assuming the fee is in advance and interest is normally paid in arrears, the effective margin on the loan is 4.025% p.a.).  If BD were able to borrow at a rate lower than 4%, it would have.   It did not.  Probably there were no real takers for a new loan because it would have made sense for BD to pay above 4% to secure term financing.

The refinancing hasn't really solved BD financing's "problem".  It has merely been pushed out 12 months.  Since the loan finances long term presumably strategic investments, it should be financed with term debt.  But there is more at stake here than short term refinancing risk. Or finance theory.

Why? 

Because of the rescheduling of Dubai World. 

If a rescheduling deal is not struck, it is unlikely that there will be banks willing to make a new loan in to a Dubai Inc entity.  And thus this loan will loom as a potential second rescheduling.  And complicate refinancings of scheduled maturities at other Dubai Inc entities.  And the raising of new financing for new projects.

If, on the other hand, as some commentators appear to believe, Dubai can dictate the terms of the restructuring, banks are going to react with pronounced shyness on new loans to avoid getting shorn again.  A lesson they should remember for at least two years.  And there will be the same implications for refinancings and new financing as above. 

Dubai Inc is, therefore, under intense pressure to conclude a reasonably acceptable restructuring quickly. 

So far there have been no apparent signs that Dubai is moving forward with any concrete action. 

Perhaps it is working feverishly behind the scenes to craft a deal.  Perhaps it hopes to jam the banks. by waiting until the last minute and hoping the pressure of an artificial deadline will cause them to roll over.  Perhaps it doesn't realize how critical time is.  Perhaps, it's just overwhelmed an the enormity of the task.  Perhaps I'm missing something. 

If it is not already doing so,  the Emirate needs to begin to move forward smartly (in both senses of the word) right now.

Borse Dubai Extends Maturing US$2.5 Billion Loan by One Year

You've probably been reading news items about the upcoming maturity of the Borse Dubai's US$2.5 billion loan this February.  Many of these stories have presented the maturity as another test for Dubai Inc.

Well, the loan contained an option for the borrower to extend the loan for another year which is what the Borse has done.  So the problem is resolved at least for a year.

Story from the Gulf News here.

And one from The National here with some speculation on capital markets issuance by Dubai entities and the expected impact on projects in the Emirate.