Dubai Escrow Law: Exemptions Fueled Boom and Left Buyers High and Dry

 Credibility - Now You See It, Now You Don't

A very good piece of investigative reporting by Asa Fitch at The National.

In 2007 with great fanfare Dubai passed a law requiring that developers set up escrow accounts to ring fence buyers' funds so they would only be used for construction and related costs on the projects that the buyers invested in. 

Rather quietly and quickly the Dubai Land Department gutted the law by granting exemptions to certain master developers. Among this select group were Nakheel and Emaar as well as other Dubai World entities.  The latter two have recently (three years later!) disclosed this fact.  Apparently, neither they nor the DLD considered it material information an investor/buyer might be interested in knowing or have a right to know.

A couple of quotes:

The developers of multiple projects in Dubai that are stalled spent money in this way, and now homeowners find that their investments were spent but that the projects cannot continue without new funding.

But having to comply with escrow laws could be burdensome for developers such as Nakheel and Emaar because of their obligation to build expensive infrastructure in their master developments. Emaar said in its prospectus last week that if it had to comply with escrow laws, its "business model may be significantly impaired as it would only be able to finance the construction of projects with corresponding purchase price instalments once certain construction milestones are met".

Poof, there goes the last illusion of Dubai as a world class financial center.

And, no, it's not a matter of professionalism  as one "expert" has it.  It's much more basic.  It's a matter of running a fair, honest market.  When the games are rigged, one is well advised to go to another casino.  When one doesn't get a fair shake (or a fair Shaykh), it's time to look to another market.

To be very clear, the central issue here is not that an exemption was given.  It was that the granting of the exemption was not disclosed.  Neither by the Government or the companies.  There may have been what were considered at the time very good reasons to give an exemption.  The problem was that buyers had no way of knowing.  They should have.  

Special Dubai World Court Orders Nakheel to Pay CDG's Legal Costs

According to Tom Arnold over at The National, Sir Anthony Evans, The Chairman of the Special Tribunal, ordered Nakheel to pay CDG's legal costs.

At this point the Court has not rendered a judgment on CDG's claim.

Dubai’s Back: CD Spreads Down But …

 Jakub Hałun
GNU Free Documentation License Version 1.2 

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.

Country	Spread
Germany	38.1
USA	47.1
Japan	59.1
China	62.9
UK	63.8
France	79.0
Saudi Arabia	80.2
Qatar	95.3
Abu Dhabi	106.4
Turkey	150.9
Bahrain	175.7
Oman	221.0
Egypt	227.7
Lebanon	288.7
Dubai	391.3

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.

"We're Back" - Part II: "Back to the Future"

Two Unnamed Lenders Unsuccessfully Attempt to Retrieve Their Loan

We're back indeed!

Seems Limitless needs another six months. 

Guess lenders should have figured out that when the borrower's name is Limitless, there could be all sorts of related problems with amounts and repayment.

I can't wait for the sequel.  This plot has got at least a couple more runs.

Construction Delivery Group Files AED49 Million Suit Against Nakheel

Bradley Hope over at The National reports that CDG has filed an AED million suit against Nakheel at the special Dubai World Tribunal at the DIFC.

Here's an extract from the claim filed by CDG (Dubai World Special Tribunal Case DWT-0008-2010).

The DWT website is at www.dubaiworldtribunal.ae.

1.The Claimant claims against the First Defendant and/or the Second Defendant and/or the Third Defendant  damages, monies due, interest, legal fees, costs and expenses.

2.The Claimant's contractual and non-contractual claims arise out of and in connection with a contract (PJ-338) and/or contracts for the provision of Facilities Management Services (comprising Mobilisation Phase Services and Operational Phase Services in respect of 1,224 villas and 114 “Canal Cove homes” located on the Palm Jumeirah, Dubai) between approximately March 2007 and January 2009.

3.The Claimant Claims:

(i)  AED 24,514,464.49  Mobilisation Phase: unpaid fees to 31 January 2009
(ii) AED 2,608,347.75  Mobilisation Phase: loss of profit 01 February 2009 – 30 June 2010 
(iii) AED 6,001,899.58  Operational Phase: unpaid fees to 31 December 2008
(iv) AED 1,369,200.00 Operational Phase: loss of profit 01 January 2009 – 31May 2009
(v) AED 4,097,925.00 Operational Phase: Maintenance Services; fixed running costs for villas exceeding 400;  01 June 2008 - 31 December 2008
(vi) AED 982,534.00 Loss and damage: office, plant and equipment
(vii) AED 103,235.69 Loss and damage: emergency stores
(viii) AED 1,095,149.87 Loss of main office overhead contribution
(ix) AED 679,023.69 De-mobilisation costs on wrongful termination
(x) AED - To be advised  Loss of the use of the Claimant's Performance Security (AED 1,569,460.00) for the period 10 February 2009 – 07 October 2009

Interest pursuant to Articles 88 and 76 of Federal Law No. 18 of 1993: the Claimant claims compound interest on the above amounts at 12% per annum from the date such sums accrued to the date of payment, alternatively at such rate and for such period as the Tribunal deems fit.

As Bradley notes the process and outcome of the case will be closely watched to see how the Special Tribunal works.  As well, whether the ST gives smaller creditors a way around the rescheduling.  It would seem that CDG perhaps does not intend to contract with Nakheel again.

Dubai: More Pain to Come

Tom Arnold over at The National has an article on the pain likely to come from Nakheel and Dubai Holding restructurings.

As well as a few quotes from the ratings downgrade of ADCB.  Sounds like Brother Eiraqat already needs more than two 1000 mg Dolgit.

Dubai World: Aurelius Capital Management, The Single Recalcitrant Creditor?

According to the Financial Times quoting informed sources close to DW, Aurelius Capital Management with a $5 million stake bought in the secondary market is the only creditor not yet to have signed on to the rescheduling.  

The company is billed as a US company.  It's unclear if there's a relation to Aurelius Capital Management in Vienna.   Perhaps this is a US-based fund managed by ACM Vienna?  There is an office for Aurelius Capital Management LP and Aurelius Capital Partners LP at 535 Madison Avenue in Midtown Manhattan.

With this level of acceptance and ACM's small ticket, it seems they can be easily brushed aside by recourse to the DIFC Special Court.  Once the Court ratifies the restructuring, I think that ACM would be effectively crammed down not just in the UAE.  

Perhaps, ACM is hoping that it's so small a fish, that rather than incur the fuss, DW will pay it to go away.

It all depends on how DW wants to respond.  Since Dubai Inc has other debts to reschedule, it may make sense to make an example of a recalcitrant creditor. Particularly, when the stakes are low.   If the Company wants to play hard ball, it can string  ACM out in court actions in other jurisdictions, forcing them to incur legal expenses.  Holding payments in escrow until they sign the rescheduling. 

Dubai World: The Impact of the Fixed Interest Rate on Secondary Debt Prices

FOR SALE 

 

Great Price.  One Owner Only! 
Carefully Underwritten and Maintained

Asa Fitch over at The National has a report on secondary loan sales of DW debt.  As per his report only US$25 million has been sold so far by an unnamed Asian bank at US$0.55 of par.

Traders are quoted as saying there is a disconnect between the bid and offer prices with sellers looking for modest discounts and buyers thinking more in the range of 30 to 60% discounts.  That's an extremely wide range - which indicates the lack of real demand.  Also it may be reflective of differing discounts for the five-year and eight-year paper.

For a potential buyer there are two key risk issues with a purchase:

1. Repayment Risk - Will DW settle its debt in full?  So there is a premium added to the "risk free" yield to compensate for this risk.
2. Interest Rate Risk -  DW's debt is at a fixed not floating interest rate.  The price of financial instruments with fixed interest rates moves inversely to the current market level of interest rates.   If you think about that it makes perfect sense.  If the market if offering to sell you a new bond with a fixed 5% coupon, why would you pay the same amount for an equivalent credit risk bond with a fixed 2% coupon and the same repayment profile? You'd be willing to buy the 2% bond only if its price were less than par.  Sufficiently less so that you earned 5% on  the bond. The extra bit of yeild coming from capital appreciation.  This price risk exposure is measured by duration and convexity. Duration estimates the price change using a linear approximation of the price change function (equation).  Since the actual function is not linear, a second approximation, convexity, (technically the second derivative) is used to correct the first. Bond sensitivity to interest rates can work both ways.  If market interest rate levels decline, then one's bond is worth more.  That is, reversing the example above, one has the 5% coupon bond in the 2% market coupon environment.  As noted above in the original example, if market interest rates increase, one's bond is worth less.  Since DW's bonds are at below market rates and since market rates are at historic lows, there is little upside potential.  Any buyer will be focused on pricing the downside risk into it's bid.  Compounding the pricing will be the credit risk element.  Just to complete the discussion, floating rate instruments are less much sensitive.  Their duration is generally equal to the length of the repricing period not a function of maturity.  With, for example, a quarterly interest payment reset one can ignore interest rate risk.

These two factors affect the discount.  The bigger the required yield on the instrument the bigger the discount.

Since I haven't seen much discussion of interest rate risk, and since I think it's an important factor affecting the secondary pricing of DW debt, I'm going to focus on it in this post as you may have guessed from my "succinct" discussion of this topic immediately above.  

This is a structural issue.  As the restructuring was crafted, lenders had two options to reflect the economic value of the debt.  

1. Haircut the debt and get a market or near market rate on the debt. 
2. Maintain the fiction that the debt was worth par and take a below market interest rate.

Why did they choose the structure they did?

Some potential explanatory factors:

1. The importance of cashflow to DW.   DW is cash strapped.  A higher interest rate will impact them more now than reduced principal repayments which in traditional restructuring style are going to be backended.  DW's overriding goal is to delay as long as possible the sale of assets, hoping that an economic recovery will allow them to realise more value.  Or that  a refinance will become possible.  Particularly important because a lot of these were purchased at the top of the market with more than modest levels of leverage. 
2. The wise lenders in the steering group who have the remarkable accomplishment of being responsible for 60% of DW's debt (Another great moment in banking!) are probably not going to be selling because the pain would be too great.  It's much easier to absorb say an US$11 million loss on one's US$25 million stake than say a US$2+ billion loss.  So they have no burning incentive to  create a more seller friendly structure.  They're holding at cost not marking to market.  Assuming DW performs under the restructuring, their "haircut" will be the IAS#39 mandated one time present value difference using the new interest rate versus the older higher one.
3. Forgiving principal sets all sorts of dangerous precedents and raises all sorts of dangerous ideas in the minds of borrowers.  
4. Also since interest rates can't go negative, an interest rate reduction has an absolute bound in terms of the haircut.  
5. Additionally, many folks don't understand the concept of present value so an interest rate reduction is not considered as serious as a principal reduction.  You might be surprised (and maybe some of you dismayed) to learn that in many institutions a principal reduction requires a more stringent approval than an interest rate reduction - even when the present value impact is the same.   With the financial press and the average investor the awareness appears to be even lower.

 As usual,  let's begin with the assumptions:

1. A market-demanded discount of 50% of par.   Roughly in the midpoint of the mentioned discount rates.
2. An average 5 year life for the 8 year DW restructured loans.  Since we don't know what the principal repayment schedule is, we have to assume an average life.  I think five years is a good guess. DW's repayments probably mirror the pattern typical for restructurings:  low payments in the first years with the largest in the latter years.  If equal amortization would result in a bit over 4 years average life, then 5 years should be on the safe side. Use of 5 years then sets what I think is a reasonable upper bound to the YTM.  In any case hopefully enough for a directional analysis.  Hint:  I will gladly receive a copy of the  restructuring term sheet if anyone wants to send it to me.  Use the Contact Form to make the initial contact to agree transmission details.
3. A 2% (fixed) coupon.
4. Repayment in full on schedule assumed.

Here are the numerical results.

We can bound the yield to maturity on the 8 year tenor loan between two  points.

Yield to Maturity ("YTM")

1. Assuming a straight bond with a bullet repayment of principal at the end of Year #8, the YTM is roughly 12%.  While interest payment frequency affects the YTM, the difference is minor.  For our directional analysis, I'm therefore going to ignore it.  12% represents the minimum YTM because the restructured loans provide for principal repayments during the life of the loan not just at the end.
2. Using a 5 year average life, the rough YTM is 17%.

Modified Duration

1. For the straight 8 year bond, duration is very roughly 7 times.
2. For the straight 5 year bond, duration is very roughly 4.5 times. Recall that as above we're guesstimating that the average life of the loan as 5 years.
3. What that means is that if  interest rates increase 1% with no change in default risk (credit rating of DW) and no change in credit spreads (the margin demanded for a specific credit grade), then the DW debt will lose roughly 4.5% of its market value. I've chosen to ignore convexity here because it's not likely to be a significant decrease of the duration impact for  the range of likely market interest rate levels.  Since over the next five to eight years, interest rates are more likely to go up than further down, this is a real risk.  A modest 2% hike in interest rates and there is a 9% loss - which will more than outweigh the coupon earnings.
4. Of course, for an investor who intends to hold the bond to maturity, the price loss will be a mark-to-market event and not necessarily a cash flow loss.  Unless of course the investor sells the bond.  However, a fund or a trader will be marking to market and thus performance will be affected.    With a direct impact on such personally important things  for a fund as fees and reputation for the next fund sale. Or for a trader his bonus and perceived trading skills. You can probably easily imagine how these might increase reluctance to increase one's bid, particularly when demand is minuscule in relation to supply.

Other Factors Affecting Demand

1. Secondary Play:  There is no secondary play here.  Often in distress situations, buyers of debt may be motivated by the chance to acquire a company cheaply (buy the debt wipe out the existing shareholders) or other factors.   Emirates Airlines or Emirates NBD are not on offer.   The restructuring is "done and dusted" so there's no negotiating leverage over deal terms.  And one would have to make quite an investment to acquire a blocking vote on the chance there would be a future covenant hiccup that one could take advantage of.    One of our regular commentators, Laocowboy2 mentioned a time-honored sovereign debt settlement mechanism - using the debt as the currency for investing in a new project in the country.  Often with the debt being exchanged at par (not its purchase price) and sometimes at a favorable FX rate which effectively lower the cost of the investment.  Many an savvy investor in Latin American tourism reaped a bonanza return using this framework.  Others who invested in more brick and mortar enterprises less so.  Hint:  An investor's return in such transactions depends more on the creative use of imaginative transfer pricing than one's ability to run a business, though the latter is important.  In any case,  I suspect it is unlikely that Dubai will offer such a program.  The sovereign debt "hole" here is not that deep. Nor the distress that acute at present.
2. Credit Rating Upgrade:  While the "hole" is not that deep, there is still a hole.  Assuming good performance, at some point DW will be upgraded.  However, this is unlikely to happen in the near term.  By the time significant debt is repaid, it may be so close to final maturity that the impact on YTM may be relatively modest. As well, the structural fact that the debt is at a below market fixed rate is going to work against any significant increase in the price.   
3. Credit Spread Compression:  Usually this occurs in times of irrational exuberance.  Judging by the state of the world economy, a near term return to such giddy days is perhaps not a bet a savvy investor would make today.  And again the very low fixed rate is a negative.
4. Prepayment:  It's unlikely that DW is going to prepay the loan in the near term. If it did,  the YTM could dramatically improve. With a rate this low there is an incentive to ride to maturity. Presumably, the desire to "repay" the restructuring and remove a living blot from its escutcheon would be a motive to refinance (when that was possible).  More importantly, it could alleviate cashflow demands, including the requirement to dismantle its expensively acquired empire of  "core" investments.  The unknown is when banker and investor ADD will kick in and permit a refinance.  A good guess is probably more than 3 years out, particularly as the upcoming US$30 billion of new maturities over the next 2 years will remind the apparently congenitally forgetful and heedless of the "hole".

Dubai World: 99% of Creditors Agree Rescheduling

According to Asa Fitch at The National DW has issued a statement that roughly 99% of creditors have agreed the terms of the restructuring.

An outcome never much in doubt once the steering committee representing 60% of the amount of the debt agreed the terms.  The remaining banks knew that it would take just a few of their number to reach the "magic" special DIFC Court threshold for a potential cramdown.  So why not sign up and get the early bird bonuses?  Also the rescheduling represents the better alternative for recovering the maximum amount of money.

An accomplishment for DW.  But now comes the more difficult bit.  Meeting the terms of repayments.  And in order to do so, probably parting with some of the "Vision's Dreams" at a loss.

Dubai: Athens on the Creek?

Photograph by Tbc  Released to Public Domain

Martin Dokoupil at Reuters has a rather negative report on Dubai's financial condition quoting a Bank of America Merrill Lynch report that 

1. Dubai state owned companies are "sitting" on US$100 billion of debt of which US$30 billion comes due through 2012
2. Dubai's debt is 170% of GDP compared the article notes to Greece's 103%.

That last statistic sounds quite alarming.  But before you plunk down that deposit for an off plan villa at Palm Athena, recall that much of the US$100 billion was debt incurred by corporations not the sovereign itself.  In many cases entities with real businesses.  Emirates Airlines.  Emirates NBD.  Dubai Ports.   In several cases businesses that are incorporated outside of the Emirate.  Or whose main theaters of business activity are outside of the Emirate.

That doesn't mean that everything is just fine.  But rather as always one needs to look behind the headline or headline ratio to the details.

Dubai World: Offering “الطيور المبكرة” an Extra 20 BP on Interest Rate

According to AlKhaleej newspaper (Dubai), informed sources at Dubai World tell it that DW is offering   “الطيور المبكرة” ("early birds") an extra 20 basis points on interest if they accept the Company's rescheduling plan this Thursday 9 September.  This is in addition to other incentives offered early acceptors - which presumably includes the signing "bonuses" mentioned earlier.

The 9th is the first day for creditor responses but is not the last - though the newspaper's source didn't provide details except to say the final date is in the coming weeks.  Earlier DW had given 1 October as the "final" date to determine the fate of the plan - which would put the last date for acceptance by bankers at least 5 or so days earlier.  That latter bit is my estimate.

The article also repeats the Company's earlier comments about how the longer tenors will enable it to obtain more from asset sales along with the remark (threat) that in the case the banks fail to agree and resort to the courts they will likely receive nothing.  Finally, the agreement of the steering committee representing 60% of DW's exposure is noted.  Already the earliest of the early birds.

It's likely that the Company will achieve the necessary level of approval to secure an effective cram down of creditors using the special DIFC court.  

And what appears to be the long running "soap opera" of agreeing a rescheduling will come to an end, though there will be at least 8 more seasons of implementation.  Not quite a 54 years' run, but still respectable particularly in today's ADD world.

Dubai World: No Assets Ring Fenced From Sale

Reuters has published an exclusive report that they have a document circulated among DW's creditors which states that:

1. Total DW debt is some US$39.9 billion instead of the mid US$20 billions.
2. Though there is an apparent US$11 billion non recourse debt at Istithmar subsidiaries and US$2 billion at Infinity.  These amounts are important because they will affect the net proceeds from the sales of those assets.  Debt at the subsidiaries will have to be either assumed by the buyers or repaid by the seller (Istithmar).  
3. DW warned that if it sold its assets quickly it could only raise US$10.4 billion.  It's a safe bet that DW is being conservative as it doesn't want to give the lenders incentive to push for a quick sale.
4. Rather it needs 5 to 8 years to realize the assets at higher prices - the midpoint of which is US$17.6 billion.  The highpoint of which is US$19.4 billion.
5. Heretofore strategic and ring fenced assets are now on the table:  DP, JAFZA, Barneys, Atlantis Hotel, etc.   Though one might question whether this is more a negotiating tactic.  It's hard to imagine the Emirate parting with these assets.  So the hope may be that a recovery in markets will lead to higher values recognized on other assets.  Or that bankers' and investors' ADD will kick in and Dubai World will be able to refinance after five or so years.  Either case obviating the need to part with the "crown jewels".  And, thus, any sale would be an absolute last resort.
6. In an attempt to get banks to sign on to the rescheduling, DW is offering a signing bonus / consent fee.

Quite a remarkable turnaround.

But with roughly US$40 billion worth of debt and US$20 billion from asset sales, there is quite a "financing gap" to fill.  Even more so, when one considers the fact that as the prize assets are sold, DW's right to their earnings and cashflow will end as well.  Is the gap to be funded by the Emirate?  If so, quite an expensive admission ticket to a relatively short ride on the "leveraged assets express".

Anyone out there who would like to share any creditor documents with me can contact me using the Contact Form.

Abu Dhabi Commercial Bank - AED 306 Million Loss for 1H10

By now you've probably seen the press articles on ADCB's 1H10 results and perhaps as well it's press release and the financials themselves.  The loss was due to the Bank taking an AED1.035 billion provision for its AED6.6 exposure to Dubai World. 

Here are some points that caught my eye.

First, the Financials.

1. Customer Deposits have grown from AED86.3 billion at 31 December 2009 to AED96.8 billion at 30 June 2010.  AED90.1 billion at 31 March 2010.  Unfortunately, there's no note for Customer Deposits so it's not possible to see where the increase primarily came from - government, corporate or retail clients.   Anyone out there with any information, please post.  As well, if  anyone knows, if ADCB is paying above market for funds.
2. Note 2: Bank Deposits - While there is a non trivial AED1.0 billion decrease, the major story here is the shift.  Deposits with banks in the UAE is now 44% versus 33% at 31 December 2009.   A greater proportion of AED deposits?  Helping provide FX funding in the local market.  BTW you'll note that balances with the UAE Central Bank increased by AED700 million roughly the decline in interbanks.
3. Note11:  Interest receivable has increased roughly AED230 million (of which AED147 million was in 1Q10) to AED837 million - some 37.8% over Fiscal Year End 2009's AED607 million.  Looking at Note 14, you'll notice that Interest Payable actually declined 4.0% to AED952 million from AED992 million at FYE09.   Unclear if this is timing differences.  Longer interest periods on loans than the deposits funding them.  Or a sign of some distress.  Something to keep an eye on.

Second, Press Release.

1. Loan to Deposits Ratio.   Yes, the ratio has come down from 135% to 123%.  You'll note it was 151% (! ?) in March 2009.  That's the right trend.  But, sorry to be impolite but a loan to deposits ratio over 100% is not sound banking practice.  In fact it should be lower.
2. "We have taken a more disciplined approach to pricing risk and have significantly enhanced our capabilities in risk management and strengthened controls across the business. As a result of the current economic environment, both corporate and consumer segments continue to experience high levels of stress and therefore we have had to take significant impairments in the first half of 2010.”  And would seem to have some more miles to go.  To be fair it does take time to turn around a big ship.  And changing a corporate culture perhaps even longer.
3. Dubai World Provision - I had understood that the Central Bank of the UAE had asked banks to refrain from provisioning until the restructuring was finalized and they had a chance to study the implications.  Is ADCB pulling a Citibank here?  If you know your banking history (and who doesn't devote lots of time to that interesting topic?),  that question will remind you of the action taken by Citibank to provision for duff sovereign loans in the 1980's.  In effect setting a "standard" for other US banks all of whom (including Citi) had heretofore been pretending that those loans - particularly those to Latin borrowers - were "as good as gold".  Is ADCB getting out in front of the pack so that when other lenders do take the provisions, that Quarter ADCB will be able to report a profit amid a sea of red ink at its competitors?  Or does it have more major pain of its own to take and is trying to spread it out in more manageable chunks?
4. Non Performing Loans:  Increased some AED491 million and the NPL ratio (NPLs to Total Loans) from 5.2% at FYE 09 to 5.4% at 1H10.  That looks good until one notices that the Total Loan portfolio has increased from AED116.6 to AED118.8 billion.  Hopefully, we can assume that none of that AED2.2 billion increase has gone bad yet.  Using total loans at FYE09,  the NPL ratio is 5.8%.  That I think is fairer measure.  
5. Provision Coverage:  ADCB's press release notes that its Provisions to NPLs ratio is 76.7% as of 1H10 versus 67.8% as of FYE09.  That looks good until one notices that the AED1.035 billion provision for Dubai World in included in the Provision total but none of the DW exposure as NPLs.  The latter presumably because DW is not past due on payment.  If we strip the DW provision out, ADCB's Provision Coverage is 61.3% a decrease from FYE09.  It's hard to understand the logic behind ADCB's calculation unless of course it considers the DW exposure "as good as gold".
6. Collateral:  AED2.8 billion at 1H10 versus AED5.5 billion at FYE09.  No explanation for the 50.9% decline.  Valuation changes?  Realisation of collateral to repay loans?  Clients repaid and collateral was returned to them?  All bits of information that would help assess the credit health of ADCB.  The note does mention that much of the collateral for NPLs is real property.  Is that the hint to the reason - further mark downs of property?

As indicated above, some trends to watch on the credit front, though the Bank's main shareholder has supported ADCB from its birth to today whenever it needed funds.  And has the resources to do so again. 

Dubai World Restructuring: Hard Slog to the Finish Line

Business Maktoob reports that Dubai World will meet with its creditors 22 July to make another presentation on the terms of the proposed restructuring.  And that subsequent workshops will be held in Hong Kong, London and Dubai to allow banks to pose questions on the restructuring to DW's expert advisors.

It's pretty clear that the sales process is still continuing.  

And from the number of "commercials" DW is either taking no chances on the outcome of the creditors' vote.  Or perhaps more likely has been encountering some resistance to the deal.  I say that because the 22 July meeting is at least three weeks behind the original schedule.  If smooth sailing were expected, the presentation would have taken place already.  And the creditors' deadline for a response would be running.   It's not. 

While ultimately a deal will be done (as the alternative is unthinkable), if a sufficient number of banks balk, there might be some improvement in terms.

Limitless Limits Its Exposure: Pulls Out of Haute Development Malaysia

On 8 July Bandar Raya Developments Berhad announced that its subsidiary had entered into a conditional sales agreement with Limitless to buy its 60% stake in Haute Property SDN.  Haute was set up with UEM  (who own 40%) to develop luxury homes in Johor State.

Ardent will pay Limitless:

1. RM1.0 (roughly US$0.31) for Limitless' 60% stake in Haute.  (The company's unaudited financials show negative shareholders' funds).
2. RM 75 million (US$22.9 million) to reimburse Limitless for partial payment of development rights.  The amount will be converted to US$ at the FX rate at time of payment RM3.27 = US$1.00.  While the RM/US$ rate is currently RM3.196, this will not represent a loss to Limitless as it should get back the exact amount of US$ it paid.
3. RM1 million representing full and final compensation to Limitless for the RM10 million it advanced Haute for operating and development expenses.

The project is still in the development stage.  It's expected that there will be revisions to the development plan.

For those interested in a trip back to the original Limitless announcement, here is the link.

This move allows Limitless to exit the project with minimal losses and eliminates potential cash calls.  And no doubt not the last step by the various companies in Dubai Inc to reduce foreign projects to concentrate now limited resources at "home".

BTW anyone out there able to cite a single instance of such a comprehensive announcement on a GCC exchange?

More Signs of Real Estate Woes in the UAE

According to Bradley Hope at The National, Sorouh Real Estate has introduced a "rent-to-buy" scheme for commercial tenants at its Sky Tower on Reem Island.  The plan is apparently designed to "fill out" the remaining 20,000 square meters of commercial space.  Previously, Sorouh had offered a below market rate of 4.99% to first time buyers at its Sky and Sun Towers in the Shams Gate project on Reem.

This follows the announcement earlier this week that Dubai had given Nakheel's Board control over Limitless.    I suspect this is the first step towards combining the two companies as a way of reducing costs as well as adjusting capacity to realistic prospects for demand.

As you'll notice from this article also from The National, Limitless' problems were caused by the "global" (financial) crisis.   On a personal note, I was gratified to see that TN did not use the term "Global Financial crisis" using the SAM stylebook with all lower case letters.  There are some sensitive folks up North as AA knows only too well.

Dubai World - Implication of Loan Sales

The Financial Times reports that some banks have begun selling their almost restructured DW loans.  Apparently, the price is something in the 55% of nominal range.   The article goes on to say that DW is considering using "Decree 57" which created a special regime for DW to seek protection under the DIFC Insolvency Law.  Under that law, a company may cram down dissenting creditors and force them to accept a restructuring - similar to the Financial Stability Law in Kuwait.

Some observations:

1. It's not surprising that some banks would be heading for the exit and perhaps taking a larger than required "haircut" just to be free of the restructuring - including those often overlooked indirect costs of administering and following a "special" loan.   Exitors will generally be smaller banks with no real ongoing business with the Emirate.
2. A US$25 million sale out of US$23.5 billion does not a trend make.
3. It's unlikely small trades will give dissidents control unless the existing lenders are highly divided on the restructuring.  On this topic recall that the Co-Ordinating Committee accounts for some 60% of the debt.  Local lenders are likely to go along.  If required, local governments can promise them a capital infusion or low cost deposit to compensate for any direct pain they may feel on the restructuring.  Both methods of course would strictly speaking not constitute preferential treatment.
4. From an investment point of view, assuming a bullet repayment, the IRR on the cited transaction is something around 11%.  With more frequent principal repayments the IRR is higher.  Not a bad return.
5. The public announcement of the readiness to pull the DIFC trigger no doubt is designed to dissuade vulture investors.

Dubai Debt Rescheduling Watch: DHCOG AED23.6 Billion Loss

DHCOG's 2009 audited annual report is out.  AED23.6 billion loss.  Equity at AED14.6 billion versus AED37.1 billion.

More commentary hopefully later today.

Dubai Debt Rescheduling Watch: Drydocks and Maritime World to Restructure US$1.7 Billion

GulfNews reports that there's a new board at Drydocks and Maritime World and that the Company is in talks with its banks to restructure some US$1.7 billion maturing this November.

The new board comprises Hamed Mohammad Mattar Bin Lahej, Ahmad Eisa Hareb Al Falahi, Khalid Ahmad Bin Turkiya, and Geoffrey Taylor.  Taylor will be CEO.

"We are going through a process of discussions with the banks to restructure our $1.7 billion loan ... Obviously the market changes which occurred significantly slowed down our ability to meet our original schedules," said Taylor.

"We are going through a restructuring process," he added.

Dubai Debt Problems - Someone Else's Fault

As per this article from The National

Dubai’s financial slowdown should be treated as a “special case” caused by the downturn in world trade and had nothing to do with the intrinsic productive capacity of the emirate’s economy, the UAE economic report says.

It seems the culprits were:

1. Banks and investors who didn't provide sufficiently long-dated capital to finance Dubai's real estate projects.
2. Foreign investors whose tremendous and apparently imprudent large capital inflows contributed to a form of the "Dutch" disease causing rampant inflation.
3. The global financial crisis.  Long time readers of this blog will appreciate our standing comment that this is a "global" and not a "Global" crisis.

Despite the short-sighted actions of these external parties, there are a few bright spots:

“The case of Dubai is ‘special’ also because very large investments have been made in its soft infrastructure, in both industry and government, which will have highly positive effects on the long-run development of the emirate,” the report says.

Besides being "special", and I trust you'll note the comparison here is Emirate-wide:

“But perhaps the biggest improvement in the overall productivity of the UAE in general, and specifically in Dubai, is the high efficiency of Dubai government agencies and departments which adopt first-best policies and international best practices …,” the report says.

 And

When these factors are recognised, it will position Dubai as one of the “most competitive cities in the long run”, the report concludes.

A hat tip to The National for helping to set the record straight.