Dubai Five-Year Credit Default Spreads

Not surprisingly, after the announcement by Dubai World that it was seeking a six month payment standstill for certain of its subsidiaries, the market began re-rating those companies' risk. As well, the market also began taking a closer look at the risk of the Emirate itself.  And country risk in general.

Using four data points – two days just before the announcement and this Tuesday and Wednesday – we can see the impact. Data is from Markaz Kuwait. Links to their GCC Fixed Income Reports are in the table immediately below.  Click on the dates to access the reports.  Note the CDS data in a report is from the close of the previous day.

23 Nov	24 Nov	8 Dec	9 Dec
306.7	323.4	559.4	598.71

The increase is 292 basis points or 95%. To put this into context, a 10 basis point increase in the credit spread on US$1 billion results in an extra US$1 million in debt service.   Note: a change in credit default spreads does not change the credit spread on existing debt. It might, however, influence the price on new debt.

We can also compare the impact on several other states in the region and use the changes in their CDS spreads as a context in which to view the market's reaction to Dubai.

Country	23 Nov	24 Nov	8 Dec	9 Dec
Abu Dhabi	99.7	99.99	145.56	177.32
Dubai	306.7	323.4	559.4	598.71
Bahrain	172.02	171.94	209.78	212.22
Qatar	93.83	93.57	111.68	119.38
Saudi	74.9	74.9	95.7	98.51
Egypt	217.7	217.7	240.0	241.6
Lebanon	259.98	259.99	269.6	269.6
Turkey	192.24	195.3	192.08	192.08

The major impact as expected is on Dubai.

However, Abu Dhabi was affected as well with a 77% increase in its CDS spread. This makes little if any sense. The Emirate has substantial financial wealth and an even more substantial liquid "bank account" (oil) in the ground.

Bahrain's CDS went up 40.2 basis points, roughly 23.4%. Qatar's up 25.6 bp or 23.6%. Saudi's up 23.6 bp or 31.5%.

Lebanon's moved up 9.6 bp - a negligible 3.7%.  Considering the credit metrics of Lebanon, one might wonder as Qifa Nabki did in a recent post about Lebanon's capacity to service its debt.

And for added context here are some ex-region comparatives.

Country	23 Nov	24 Nov	8 Dec	9 Dec
PR China	78.62	78.62	98.51	75.1
France	27.0	27.11	26.83	28.05
Germany	22.42	23.32	22.94	24.46
Japan	70.9	71.58	91.78	66.5
UK	65.71	66.8	77.04	83.74
USA	31.83	31.83	33.49	34.96

From this chart, it's clear that 9 December was either (a) a day of higher than usual nervousness or (b) a day on which one or two counterparties were shedding risk in their portfolios. Presumably, now that the market has rediscovered (but if history is a guide, only for a while) country risk, some financial institutions may be moving to trim down outsize exposures through buying a bit of insurance.  In this process, the UK suffered the most damage with an 18 bp increase or 27.4%.

Some caveats:

1. The CDS market is thin.  Several same direction trades (all buys or all sells) can move the market price.
2. As with other financial instruments, sometimes sophisticated market participants engage in herd behavior and are known to be prone to irrational exuberance or stark terror.  
3. As mentioned above, a change in the CDS spread does not automatically change the credit spread on an existing loan or bond.  It may however influence the price at which new debt is raised.
   

The take away is that these price changes are not necessarily an accurate reflection of credit risk as I hope the changes in spreads on Abu Dhabi and Lebanon note show. 

In fact Bill Gross at PIMCO (Pacific Investment Management Company) is buying up Abu Dhabi and Qatar bonds believing they are mispriced and that he can get a bargain now.  Bill is such a large player that his deals can move the market.  

Apparent Dramatic Improvement in GCC Security? Or Outbreak of Diplomatic Illness?

The Sixth Annual International Institute of Strategic Studies Regional Security Summit is being held in Manama from 11 through 13 December.

In an apparent sign of markedly decreased tensions in this formerly volatile part of the world, neither Secretary Gates from the United States nor the Foreign Minister of France, Bernard Kouchner, needed to attend. Secretary Gates was in Kirkuk for a clearly much more important "sunny day town hall meeting" with 300 US troops. Foreign Minister Kouchner was in Paris to join President Sarkozy for critical meetings with President Mubarak of Egypt who is arriving Sunday, which coincidentally is the last day of the conference.

Completely unrelated to this bit of news were the comments by the Foreign Minister of the Kingdom of Bahrain, Shaykh Khalid Bin Ahmed Al Khalifah, against imposing additional sanctions on Iran and criticizing the exclusion of the Arab states of the Gulf from the negotiations with Iran.  And it appears even more comments here.

Also completely unrelated to both was the reported presence of the Foreign Minister of the Islamic Republic of Iran at the conference.

GCC Real Estate Projects - A Survey

With all the discussion about the fall out from real estate  in Dubai and the declines in real estate elsewhere in the GCC, I thought it would be useful to provide a bit of macro context. 

Luckily, Global Investment House has recently issued a report on the GCC real estate sector. You'll have to register to get the full text.  Click here to do so.

Based on information from MEED Projects, they've compiled a comparable table across the six members of the GCC.

Amounts in Billions of US Dollars

Country	Nov 2009	Nov 2008	% Change	Held Projects	% Held
Bahrain	$ 68.3	$ 57.7	+18.3%	$ 9.1	11.8%
Kuwait	$ 271.5	$ 298.7	- 9.1%	$ 41.0	13.1%
Oman	$ 104.6	$ 106.4	- 1.7%	$ 6.7	6.0%
Qatar	$ 204.8	$ 216.9	- 5.6%	$ 7.9	3.7%
Saudi Arabia	$ 609.4	$ 606.5	+ 0.5%	$ 39.2	6.0%
UAE	$ 915.9	$1,228.2	-25.4%	$368.2	28.7%
TOTAL	$2,174.5	$2,514.5	-13.5%	$472.1	17.8%

At 42.1% the Emirates' share of real estate projects seems outsized relative to their population as a percentage of the GCC total or to their economy as a percentage of GDP total. When the held projects are factored in, their share goes to 48.5%.

That level of activity could be the sign of several things:

1. Severe underdevelopment relative to the rest of the GCC.  I think we can rule that out.
2. A speculative boom.  From the nature of the projects, this is the leading candidate.
3. The development of needed infrastructure.  For anyone who has endured the traffic jams in Dubai or elsewhere in the GCC,  the Dubai Metro seems a worthwhile project.  But this does not seem to me to the major driver of the activity.
   

I suppose an argument related to #3 above is that they are developing the next London or Manhattan.   To paraphrase  "Field of Dreams":  If you build it, they will come.  

Not sure I buy that there is a need for a major financial center between Hong Kong and London.   Nor that there is any "natural" location for any such additional center.  Capital is highly mobile these days.  There are few to no impediments to cross border flows.  And the state of today's communications has eroded whatever earlier benefit there was from having a physical presence in a specific location.  If the new center must have a "seaside" location, Shanghai or Mumbai could serve as well as Dubai.

It's more likely that a regional center will arise in the GCC, but I doubt that at present it would need to be as large or as elaborate as London or Manhattan. 

The critical work that needs to be done is building another form of infrastructure:

1. The creation of a set of appropriate laws and regulations
2. The development of a cadre of trained judges and lawyers to implement them
3. Enhancements and actual implementation of accounting standards and regulations
4. Establishment of a sovereign bond curve as a benchmark for pricing other issues in the debt markets
5. Greater institutional participation in local stock markets 
6. More liquidity in both debt and equity markets - not only in terms of demand but also on the supply side. 
   
7. On the debt side many of the issues are not traded, particularly the Islamic structures.  Or to be more precise not traded in local markets.
   
8. The free float on many equity issues is rather shallow.   Relatively small transactions can move the price disproportionately. 
   
9. And in certain markets there are sadly issues with brokers and market makers - who seem more focused on making a market for themselves than for their customers.  Though to be fair this is not just a GCC phenomenon.  
10. Finally, there is the "silo" nature of the GCC.  At this point, countries by and large stick to their own national business.  There isn't a lot of cross border investment. 
    

Governments in the area are not oblivious to these issues as evidenced by the initiatives launched QFC, DIFC, the Saudi CMA and in Bahrain. 

There is also another issue and that is the nature of the market.  Is the market intended to be one that  primarily mobilizes capital for local use?  Or one that provides funding to other geographic regions?  

For the first alternative, Saudi Arabia would seem the natural site given its population and major share in GCC GDP.  One could I suppose argue that as happened with commercial lending in the 1980's, a nimble neighbor with a more congenial regulatory regime and living conditions could play this role.  There are two major differences between then and now.  First, GCC nationals have the primary role in financial firms - at all levels.  There is less need for Western experts to be parachuted in.  And thus less need for concern about their life style preferences.  Second, the Kingdom is not sitting on the sidelines watching others develop an offshore center to serve the Kingdom.  New regulations - particularly those from the Capital Markets Authority are designed not only to foster the development of the market  but also to "encourage" foreign firms to open offices in the Kingdom. 

Is there a role for a regional Hong Kong?  Perhaps.  And several contenders as well.

Real Estate Gets Sick But It Doesn’t Die

Many of you out there will recognize this saying so beloved of those in the GCC.

But two things that aren't are covered in the saying are:

1. How severe the illness can be.
   
2. How long the convalescence is.
   

Much has been written about the follies of the "locals" in the GCC with their real estate investments so much that AA has been thinking about enlisting "The Donald" as another of the experts from the West who might come to help put things right. He's got quite a track record especially with his gaming properties – which in true fashion he's bet the house on a couple of times, lost, then won. Sadly, each time his stack of chips seems to get smaller.

Here's a link to some other stories detailing how one can make a small fortune in the real estate business. As another old saying goes, the first step for many is to start with a large fortune. Link here.

Emirates Airlines US$1.3 Billion Financing

The press is reporting that Emirates has raised US$1.3 billion in financing for six A380 aircraft from Citibank and Doric Finance UK.

A couple of observations:

1. The financing is supported by guarantees from the export credit agencies of France, Germany and the UK.  In effect the lenders are not taking financial risk on Emirates or Dubai.
   
2. In most cases, the ECAs require that the loan be structured as a finance lease.  A special purpose entity ("SPE") is the owner of the aircraft and it leases it to the airline.  This is designed to give the ECAs a greater ability to repossess the plane if the airline doesn't pay.  To that end there is a special convention under Unidroit (the so-called Cape Town Convention) which embodies international agreement on this security structure.  More on the Cape Town Convention here.  The UAE is a signatory to the Convention.  The ECAs generally only lend to borrowers from a country that has signed the convention.  And the SPE has to be incorporated in such a country.
3. Also it's important to note that ECAs will often extend credit to borrowers that the free market will not support, either because of concerns about their creditworthiness or the terms of financing (tenors, rates and other conditions).  As government agencies, the ECAs are in the business of promoting their nation's exports through the provision of financing.
   

All this is not to say that Emirates is a bad risk.  But portraying access to ECA finance as a sign of robust financial health is a bit of an overstatement.  

Thor Asset Purchase (DEWA) Bond Holders Waive Acceleration

DEWA (Dubai Electricity and Water Authority) has issued a statement that payment on the Thor Asset Purchase Company ("TAPC") securities has not been accelerated.

TAPC is an asset backed security ("ABS") based on DEWA customer electricity receivables. 

Apparently, the transaction requires that DEWA maintain a Fitch rating above BBB or the purchasers have the right to demand early repayment.

Middle East Economic Digest ("MEED") has the fullest story I've seen to date. 

That is, in a nutshell, that the holders of TAPC waived the right to early repayment.  It's unclear whether the waiver was absolute or whether it was conditional.

Nakheel - Intercompany Funding

Looking at the pattern of intercompany funding at Nakheel from fiscal year end ("FYE") 2005 through 30 June 2009, it's clear that during the second half of 2008 there was a fundamental change.  Prior to that point Nakheel was a net debtor to the "Group".  At 30 June it was in rough balance.  In the happy state of  being "neither a lender nor a borrower".  After that period it became a net provider of funds to the Group.  And for quite significant amounts.   In fact for an amount that would allow it to settle the 14 December Sukuk without any difficulty.

A real estate development company is a heavy consumer of cash.  It supports its assets through a combination of accounts payable and accruals which would include construction and other costs.  As well as from advance payments from customers.  And debt.  Lots of debt.  It's rare that a company involved in development is a cash cow - a provider of funds to other members of its group.  Usually the holding company arranges cash for its real estate subsidiary.   It's hard to imagine a company still actively developing mega projects raising cash to fund the parent.  But it's this latter behavior which seems to have occurred sometime after 30 June 2008.

That timing coincides with the recent economic slowdown.  And my guess is that Dubai World needed cash and Nakheel was a convenient source.

Let's look at the history using Nakheel's financials.   We'll use annual reports to look at two years data in most cases.

Some "tafsir" on notation.

1. DF = Due From.  These are amounts that related companies owe to Nakheel.  They are in effect extensions of credit by Nakheel.  They would appear in the balance sheet under the caption accounts receivable on the asset side of the balance sheet.  
2. DT= Due To.  These amounts are owed to Group companies by Nakheel.  And are a form of borrowing.  They appear under the caption accounts payable on the liability side of the balance sheet. 
3. There is also the Shareholders' Account which is another source of funds.  The treatment of this changed during the period.  In the earlier years it's reported separately and must be factored in to the DT position.  For example, in the 2006 annual report.
   
4. DF-DT = Net position.  When this is negative, the Group is funding Nakheel.  When it is positive Nakheel is funding the Group. 
   
5. There is also a category appearing on the asset side of the balance sheet "loans to a related party".  These are all loans to Dubai World.  The DF and DT assets and liabilities are not only to the parent but to other related entities, which would include the government.  Keep that in mind as we go through the analysis.  I think it's very relevant for the 30 June 2009 position.
6. There is of course nothing sinister in intragroup transactions.  These can be part of the normal course of business.  What one does look for are patterns and changes in pattern.   In the amounts involved.  Or the net position among the firms.  Has a cash user suddenly become a cash provider.  These might be indications that something has changed.
   

Now to the data.

1. At FYE 2005, Nakheel's Net Position was AED0.3 billion - AED 8.4 billion = AED8.1 billion.    There were no loans to related parties.  The Group was funding Nahkeel in an amount of AED8.1 billion.
2. At FYE 2006, Nakheel's Net Position was AED0.6 billion - AED 6.7 billion = AED6.1 billion.  There were loans of AED2.8 billion from Nakheel to Dubai World.  Thus the net position was Group funding to Nakheel of AED6.1 billion - AED2.8 billion or AED3.3 billion
3. At FYE 2007, Nakheel's Net Position was AED 1.8 billion - AED6.0 billion = AED4.2 billion.  Related party loans were AED2.5 billion.  Thus the Group was funding Nakheel for AED1.7 billion (AED 4.2 billion - AED 2.5 billion).
4. At 30 June 2008 the Net Position was AED1.3 billion - AED6.1 billion = AED4.8 billion.  At that point related party loans were AED4.8 billion.  Thus, there was no funding either way - AED4.8 billion - AED4.8 billion.
5. At FYE 2008 the Net Position was AED8.3 billion - AED4.5 billion = (AED3.8 billion).  This is the first time the Net Position has been negative.  As well there were related party loans of AED 9.3 billion.  Thus, Nakheel is now funding the Group for AED13.1 billion.  And that coincidentally is a bit more the amount of the payment due 14 December of AED12.9 billion.  And one might make the argument that the borrowings during 2008 by Nakheel of US$750 million (AED2.1 billion) and AED3.6 billion largely were used to fund Dubai World.  Why?  See below the analysis of the growth in Accruals and Advance Payments.
   
6. At 30 June 2009, the Net Position was AED10.1 billion - AED 7.1 billion = (AED3.0 billion).  Related party loans had increased to AED9.8 billion.  Thus, it appears that Nakheel is funding the Group for AED12.8 billion.  But, the AED 3 billion loan received from a related party came from the Dubai Stabilization Fund (technically a related party) but not from Dubai World so the funding position vis-a-vis Dubai World is actually AED15.8 billion.

 Growth in accounts payable and advances.

1. FYE 2005:  AP = AED 4.1 billion,  Advances=AED15.5 billion.
2. FYE 2006:  AP=AED12.4 billion.   Advances=AED09.7 billion.
3. FYE 2007:  AP=AED14.1 billion.   Advances=AED12.2 billion.
4. 30June 08:  AP=AED16.3 billion.    Advances=AED18.4 billion.
5. FYE 2008:  AP=AED22.8 billion.    Advances=AED28.8 billion.
6. 30June 09:  AP=AED28.6 billion.    Advances=AED27.9 billion.

The debt raised wasn't used to pay these liabilities down.  Nor was it devoted solely to construction and other development costs.  If it had been, then Nakheel would not have been able to fund the Group.

On a related note, these amounts should be considered among the liabilities that Nakheel has to pay or restructure along with their debt instruments.  Though it should be noted that customer advances are repaid by handing over the promised real property to the client.  It's only in the case of a failure to build and deliver the property that a refund would be due.

The point of this is that even if the restructuring is limited to Nakheel and Limitless there is a lot more than US$26 billion in liabilities to be dealt with.

Global Investment House - Restructuring Agreement Signed

Global Investment House issued a press release to announce that it has signed an agreement with its bank lenders for a rescheduling. You'll recall that there is no restructuring for GIH's bonds, though GIH has provided collateral.  But see the "devil in the details" below regarding pro-rata application of repayments.

Here are some of the points from the press release that caught my eye along with my comments in blue italics.

1. There has been a fundamental change in GIH"s business away from more capital intensive  proprietary and real estate investments.   AA:  The new GIH is going to be a much different entity focused on client services:  asset management, investment banking and brokerage.  It will have a much smaller balance sheet.  As a result it will require less debt.   
   
2. Assets from the discontinued lines of business have been segregated into two separate companies., structured as funds.  One in Bahrain to manage equity investments (proprietary investments) and one in Kuwait to manage real estate investments.  AA:  The fund structure allows GIH to sell off shares to investors - which could prove another way to secure funds for debt repayments.   As well, the entire companies could potentially be sold to another fund manager.   That being said, the most likely scenario is asset sales.  Looking at GIH's 30 September 2009 financials Note 26 Segmental Analysis, you'll see that these two areas account for KD866 million or roughly  88% of GIH's total assets.  While accounting rules require that assets be allocated to business segments, management has some discretion in the allocation. And every asset has to have a segmental "home" so this is an approximation - though probably reasonably close to actual.
   
3. These two companies, the proceeds of their activities, and other assets have been pledged to the lenders. As well there is a telling phrase near the end of the description of the new facilities - that   "certain of Global's other income streams" have been pledged.  AA:  I'm reading that latter comment to mean that revenues from asset management, brokerage, etc. have been pledged.  Lenders who are owed roughly KD615 million (KD500 million in  loans and KD115 million in bonds) want to have a sufficient over collateralization in case asset realizations fall short.
   
4.  The new facilities have a three year tenor and are amortizing.  AA:  This is a relatively short period.  If markets recover slowly, GIH may be forced to sell assets at less than ideal prices.  It would have been better - and I think not represented a material increase in risk - to give Global a four year tenor.   Also note that there is a 1% step up in the interest margin on the loans each year from the first year's margin of 1.5%.  The idea is to create an economic incentive to GIH to pay.  And to compensate lenders for additional risk.
5. Lenders and bondholders share pro-rata in the asset realizations and other payments.  AA:  I think the three year tenor of the loans and this mechanism answer why the lenders agreed to let the bondholders keep their original maturities.  The banks have a similar maturity - the bond payments are heavier in 2012 and 2013.  And payments are going to be applied pro-rata.
6. GIH has shareholder approval to issue 1.5 billion new shares at KD0.110 per share (a KD0.010 premium to the nominal value).  A share issue is not planned immediately, but later when market circumstances are favorable.  AA:  Shareholders would naturally be reluctant to put additional capital into Global unless they were sure the funds were going to be used to develop the business and not merely to pay off the lenders. 
   

GIH has a restructuring deal with its lenders.

The terms are tight:

1. GIH's business model has been changed.  I think this has more to do with the lenders than with a change of strategic heart at GIH.  It's hard to imagine the lenders allowing GIH to conduct business as usual, particularly in areas that demand significant new capital during the three year rescheduling period.   
2. The company has been effectively mortgaged to the banks.  
3. The three year tenor and increasing interest margin place pressure on the company to liquidate assets.  I think these two elements are potentially onerous.  Creditors have a duty to their stakeholders to get their money back.  They also have a duty not to harm their borrower if they can.  
4. GIH's strength has been its asset management business (seeded by the KIA where Ms. AlGhunaim worked before joining the firm).   At 30 September Global had some KD2.2 billion in assets under management.  It also has a reasonably good track record with its funds.  So there is a solid basis on which to base a continuing business.
   
5. It's likely that Global will emerge from the restructuring.  However, it will be a much different and slimmer firm than it was in 2007.

The Gulf Curve Blog: Interesting Analysis on GCC Bonds

The GulfCurve blog has a very interesting analysis of GCC credit spreads with a focus on the impact of the Dubacle.   Well worth a read.

Ibn Kalb Ends Piracy

The National reports on a low tech way to prevent pirate attacks.

“Fear will spread throughout the community and young men will not volunteer to join.”

Except for the ships' crews.

Istithmar World Loses New York Hotel

The National reports that lenders foreclosed on Istithmar World's Union Square Hotel in New York City.  This is related to problems with debt service at the hotel.  It is not directly related to any problems at the parent, Dubai World.

However, as funds available to Dubai World become more scarce, it will not be able to provide funds to its subsidiaries.

Lenders to standalone projects like the hotel are likely to react to the commercial circumstances of each transaction.  If the equity holder is unwilling or unable to provide additional funding and if it makes sense to foreclose, they will.  Since many of these deals are structured as separate legal entities, they can easily do so.  The assets are to use a term popular in the financial press these days "ring fenced".

This puts more pressure on Dubai World.

As the market denies it new lending, it will need to husband cash to prevent problems like this from occurring, presuming  it makes commercial sense to support a project.  

And  such a need could possibly be a motive to compel them to seek a wider restructuring than just Nakheel and Limitless.

Dubai World - AlQabas Report - Commercial Bank of Kuwait Denies Any Exposure (Again)

Today's AlQabas - published last night  on the Internet - contains an article suggesting that banks may have overlooked some exposure to the Dubai World group.  It's based on a table compiled by City Research using Dealogic (a financial sector publication specializing in reviews of transactions).  Commercial Bank of Kuwait was named as having a large exposure.

This morning CBK issued a press release denying any such exposure and that it had contacted City Research.

[11:28:51]  ِ.ايضاح من البنك التجاري الكويتي(تجاري) بخصوص ما نشر فى احدى الصحف المحلية
يعلن سوق الكويت للاوراق المالية بان البنك التجاري الكويتي افاد بخصوص ‏
ما نشر فى احدى الصحف المحلية اليوم تحت عنوان 293 مليون دولار لبنك ‏
محلي بذمة شركات متصلة ب"نخيل"و"دبي العالمية" ودعمت الخبر بجدول صادر ‏
عن مركز ابحاث سيتي بالتعاون مع "ديلوجيك" ودرءا للشائعات التي قد تثير ‏
البلبلة وتؤثر سلبا وتمس القطاع المصرفي الكويتي،يود البنك التجاري الكويتي ‏
ان يبين بانه هو البنك المعني بهذا الخبر وان هذا الخبرعاري تماما عن الصحة ‏
حيث قام البنك التجاري الكويتى فور اطلاعه على التقرير الصادر عن جهة ‏
الابحاث المذكورة بمخاطبة هذه الجهة التي قامت على الفور بالاعتذار للبنك .‏

Aidan Birkett - Dubai World & The "Profligate" Locals

Earlier I posted on an article reciting the impediments Aidan would face in  discharging his responsibilities. 

I pointed out that there was a strong undercurrent of cultural bias in the article. In effect the article's point was the "locals" had created the mess and would resist letting Aidan "set them straight".  The article detailed  the possible tactics they might use to frustrate his mission.  Things like speaking in their native tongue.   

I wonder how he'll deal with this "local"?

It would appear that we may need more an expert from the East to help sort out the Dubacle. 

Dubacle: $46 Billion and 40% Haircut?

Bloomberg is reporting that Mohammed Jaber and Paolo Batori of Morgan Stanley have issued a report that as much as US$46.7 billion of Dubai World debt may need to be restructured and that haircuts of 40 to 50% are likely to be required.

The press has as usual seized on the most sensational element.  Without the full report  - which I am trying to get - and all its details and nuances, tt's hard to evaluate the analysis. 

My own guess is that there is more pain out there in Dubai.

Heedless lenders and investors were throwing a lot of money the Emirate's way.   A lot of it short term money.   There's nothing that feeds a speculative boom like easy money.    And nothing that  causes a faster crash than suddenly sober bankers refusing to roll over short term loans. 

Dubai Inc wasn't just on a spree back home but in Las Vegas, New York, etc.  And most of that with borrowed money and leverage.  A potentially dangerous combination when asset values go down.   As indicated in my Aidan Birkett post here.

Dubai: Six Months Is Not Enough

Not unexpectedly comes the news that a six month payment delay won't be enough time to complete the restructuring of Dubai.

In a situation like this the market craves certainty. 

But it's not possible to give certainty. 

Realistically, it will probably take at least three to four months for the Company to assess its situation and begin to craft the first stage of its initial plan.

Workshop on Government Openness Closed to Public

Implicit openness I suppose.

Tie Your Camel First, Then Trust in God - Part V Maintenance Fees

I thought every developer and property owner knew that maintenance was one of those really important things.  

1. Be sure that you understand the costs of maintenance, and
   
2. Make sure you make provisions for the payment of the same.

Especially if you live in a part of the world where the climate was particularly harsh on buildings.

I wonder if there's implicit maintenance.

Sort of like the famous implicit guarantee.   The Rene Descartes philosophy of maintenance: "I think the property is being maintained, therefore it is".

Or then again maybe Shaykh Khalifa is supposed to take care of this.  This is another thing I don't think he said he'd never do. 

Kuwaiti Banks Exposure to Saad and AlGosaibi - Update

AlQabas has an article 8 December noting that despite all the other issues in the market - Dubai, the world economic crisis - this one remains a major issue for Kuwaiti banks.

Here are the main points from the article along with my commentary in blue italics.

1.  Total exposure is not less than US$1.5 billion.  AA: Maan AlSanea is Kuwaiti by birth, former KAF pilot.  He would have the sort of connections that would overcome the general "silo focus" of local banks on their home markets.
2. Roughly 50% has been reserved to date according to sources at the Central Bank of Kuwait.  AA:  You'll recall this is the general level of provisions that the Central Bank of the UAE mandated for the non bank exposure to the two Groups - saying that it represented a consensus view of both local and international regulators.
   
3. Kuwaiti banks with exposure - save one it appears -  have formed a committee which reportedly includes Gulf Bank, Kuwait Finance House, Commercial Bank, Burgan Bank to conduct negotiations with Saad and AlGosaibi.  Efforts are said to be well co-ordinated.  The banks are speaking with one voice.
4. With respect to Saad, they have written to Saudi banks asking if a separate deal has been signed with Saad.  The existence of a deal has been mooted in the press several times.  The Kuwaiti banks reportedly are threatening legal action which they note in their letter they could direct at the branches and offices of Saudi banks in the West, e.g., London or New York.   This is similar to a letter that international banks have written to Saudi banks.  The Governor of SAMA has denied any side deal.  AA:  The fact that the letter was written even after the denial is an indication of lingering concern that there is some side deal for the Saudi banks.  As I've noted before, I was told there was a  similar side deal for Saudi banks in Redec rescheduling.  Certain government receivables were reportedly assigned to Saudi banks.  The foreign banks complained to no avail and eventually quieted down. So a similar fear that history will repeat itself.   As to the basis for the lawsuit, generally each creditor is on his own.  If he can get repaid, he doesn't have to worry about others.  The one exception to that rule is syndicated loans where banks pledge to share payments pro-ratably among themselves.  The only other avenue would be a general liquidation scenario where creditors should be treated on an equal basis.  I don't think most of the local jurisdictions have a well-defined concept of fradulent conveyance - preferring one creditor over another in some set period prior to a bankruptcy.  And even if they do, there has to be bankruptcy.  If the company keeps going, then it is merely negotiating individual deals with creditors about existing loans, just as it did when it took the loans out.
   
5. With respect to AlGosaibi, the Kuwaiti banks - along with others -  rejected the Group's offer to pay 9% with the rest of the debt forgiven as "sakhiif" - ridiculous/inferior. Apparently, some dismay that AlGosaibi didn't acknowledge the debts as a first step in the negotiations.   Also an assessment that negotiations - with both AlGosaibi and Saad - would be very difficult and might take three years.  AA:  I'm told in the previous great debt crisis of the mid 80's many Saudi borrowers did not earn high marks for ethics and fair dealing in their negotiations with lenders.  One of my mentors could be set into a tirade by the mere mention of the names of Shobokshi, Baroom, and AAA - where recoveries were pennies on the dollar while the obligors managed to protect their wealth.  Some of the assets were quite well protected from creditors.  The three year timeframe may be predicated on the time taken for the "oxygen strategy" described below to take effect.  Recall that Maan AlSanea is allowed a living expense by one Western court from his blocked assets.
   
6. Ahli Bank of Kuwait has chosen to pursue legal action against Saad in New York.  AA:  A court judgment is most easily used to attach assets in the jurisdiction of the court.   Otherwise the lender marches into a foreign court with his judgment and asks the local court to enforce it.   That doesn't work particularly well with the GCC.  Back in the USA, probably all of Saad's  major assets have been  identified and many banks are pursuing them.  The court appointed "administrator" for SICL (Caymans) has already been active in US courts blocking Saad assets.  Unless Ahli knows of something that others don't and can prove it belongs to Saad, it will be in a very long line.  Perhaps the suit is an attempt to pressure Saad for a settlement.
   
7. That the Central Bank of Kuwait is providing "every support" to the Kuwaiti banks.
   
8. The target will be to block the two Group's assets in Saudi Arabia first and then around the world.  An effort that is expected to be very complicated.  AA:  The idea is to cut off the borrowers' oxygen and force them to do a deal to unblock some of their assets and to be able to conduct their operations.
   

Assuming regulators are basically right about the level of provisions, creditors are in for a long and difficult process.  And probably substantial losses on these two names.

If you use the labels Maan AlSanea, AlGosaibi, Awal Bank and The International Banking Corporation, you'll be able to track back previous articles to get a more detailed picture.

Local Commentators: UAE Central Bank Unlikely to Require Provivions for Dubai World

The 8 December issue of AlBayan Newspaper Abu Dhabi contains an interesting article on Dubai World.

Looks like a piece designed to steer towards a goal:  no provisions for Dubai World.

The argument builds its case through a series of steps.

It begins by quoting unnamed British bankers as saying that the current negotiations would lead to a mutually satisfactory solution of a rescheduling.  AA:  As this story goes, it's a simple matter of coming to an agreement to re-time payments.  And such a mutually satisfactory agreement is close at hand.   No real problem.

Then Abdul Rahman Al Saleh, Director General of the Emirate of Dubai Finance Department, is quoted  that the Emirate of Dubai is fully capable of discharging its obligations.  AA:  A bit of misdirection.  The issue isn't the Emirate's capacity to service its debts but its commercial companies'.

Then he's quoted strongly refuting the assertion that the Government of Dubai had recently announced that it would never guarantee Dubai Group's debts as though it were a surprise.  He noted that the fact that Dubai Group's constituent documents clearly state that there was no guarantee and that it's appropriate to make a distinction between the Government and these companies such as Nakheel and Limitless.  AA:  If you thought you had a government guarantee, you were mistaken.  It's your own fault.  No quibble from me on this point.  Even though you might have noticed the Government of Dubai "logo" on the prospectus for the DEWA Sukuk (with the Government in the honored "on the left" position.  But buying financial instruments is just like buying toothpaste.  One has to be able to distinguish among the claims made.  Will this toothpaste really improve my social life?  Does this sukuk really have a government guarantee?  If you read the prospectus, you saw that it didn't!

Then Moody's is quoted that Dubai World and DEWA are fully capable of attracting new investments once the current hubbub quiets down.  AA:  I'd like to see the original.  I'll bet there are all sorts of caveats.  Higher pricing.  Limited amounts.

Then Jean Claude Trichet, Governor of the European Central Bank, that Dubai does not pose any sort of a real crisis to the world economy.  AA:  The collectability of the debt and its impact on the world economy are two different things.  The world economy does not have to collapse for a lender to lose a good portion of his loan to Borrower A.  Or Borrower "D".

Bankers and financial experts consider it unlikely that the Central Bank will require local banks exposed to Dubai World to take any provisions since it is a large company and still continues to enjoy the confidence of local and foreign investors.  As well since the company merely asked for an extension of payments and not any cancellation of its debts.  AA:  This is the heart of the argument.  Not sure the too big to fail argument works w\ithout a government guarantee.  Usually too big to fail is the argument for getting one.  Many large companies have gone "south".   Enron for one.   From the rush by various financial institutions to make it clear through public announcements that they have not extended credit to Dubai World, I'm guessing there's a strong argument against the maintenance of confidence by investors.  From the reaction of local stock markets, there's a similar indication.   Finally, let's wait to see the final restructuring package before we rush to determine that there is no haircut - either direct or indirect.  There are rumors that Nakheel and other companies were offering construction companies 75% payments as final settlements with a confidentiality/non disclosure agreement part of the package.   If they can't pay suppliers why should we think they can pay bankers?  To be fair as well we shouldn't yet be assuming there will be haircuts.

Of course the Central Bank will make up its own mind and will speak for itself. AA:  And here there will probably be public policy considerations mitigating against significant provisions unless the situation  becomes obviously desperate.  Likely outcome is to put a bandage on the wound and hope that a miracle cure is found in the not too distant future.

The Investment Dar - Press Release on Restructuring

The Investment Dar has issued a press release on the restructuring.

The tone here is quite different from that in the AlQabas article I commented on.

That of course is not unexpected.  There is always a great deal of sturm and drang in these negotiations.  Having been the "best" customer when times were good, the borrower becomes a veritable pariah when he advises the banks he cannot pay.  Restoring confidence takes a while and punctual performance of the restructured obligations.

And management's natural inclination is to put the best face on any development.  To appear to be leading the process and making necessary adjustments/concessions rather than being forced to do so.

Some similar points sounded in the press release to that in the earlier article:

1. A commitment to total transparency.  (That theme was sounded more than once in the AlQabas article).
2. An enforceable security package.  (The best kind of security package to have if you're a lender).
   
3. The Chief Restructuring Officer  will serve for the entire five-year repayment period.  (A minder since the creditors have evidenced some concern about existing management - enough so that they asked the Central Bank to appoint a monitor).

We'll get a better sense of the atmosphere when the creditors respond and when we learn more about the final shape of the restructuring deal.

Lending 101 - Cost of Tuition AED500,000 + AED2,000 Legal

The UAE Supreme Court has ruled against a local bank for unsound lending practices in a recent case.

“All banks should stop granting loans to limited-income people, unless within the limits of their capabilities,” the court said.

Sometimes one has to pay a price to learn the obvious.

UAE Market Volatility Continues

Contrary to reports this week that everything was just fine in local stock markets, there's been a reversal today.

Frankly, there's nothing surprising about this. 

Until there is more clarity on the restructuring and some progress has been made with creditors, market volatility should remain high.  Especially since this market and other GCC markets are largely dominated by retail trade.  

Qatar National Bank - No Exposure to Dubai World

QNB joined the parade of financial institutions disavowing any relationship with Dubai World with a one liner at the Doha Market this morning.

Central Bank of Bahrain - Dubai World Exposure Less Than 1% of Total Assets

 

HE Rashid AlMaraj, Governor of the CBB, said today as per Reuters that Bahraini banks' exposure to Dubai World was less than 1% of consolidated assets.

Deutsche Bank - No Exposure to Dubai World

As per Reuters, Henry Azzam disclosed at a conference today.

The Tail of Two Investments: Citibank and ADIA and KIA

No, AA's spell checker isn't off this morning, though it may take one more cup of Cafe Najjar to bring all the lights fully on.

Tail is a deliberate choice: 

1. Barring a miracle or a negotiated settlement with Citi, one is facing a substantial loss beginning next March.  
2. Another has just exited an from investment in Citibank at a hefty profit.   So we are at the tail of the investments.

The first is ADIA who back in November 2007 invested US$7.5 billion in Citibank mandatory convertible bond with an 11% coupon and conversion to take place between US$31.83 to US$37.24.  Around the time the deal was struck Citigroup was trading at $32 to $33 per share.  ADIA in effect sold Citi a put option (the right to sell Citi shares to ADIA at a fixed price).  As well  ADIA also gave Citi the first 17% of the upside (the movement in share price from $31.83 to $37.24).   ADIA only gets the upside  if the share price goes higher when for example say it would get Citi shares trading at $41 for $37.24.   An investor would do a deal like this if  its expectations for volatility in Citi's stock was low for  the option period. Or if it believed that volatility was all one way -- the upside.  ADIA recently was cashed out by Citi at the lower $31.83 price.  Citi's stock price is roughly US$4.00 now.  You can do the math on the  impending loss based on market price.   Here's an article from The National.  Recall AA's earlier post on the AED 1 billion camel.

The second are KIA who bought US$ 3billion  (I think Series B 1) from the US$12.5 billion convertible issue in January 2008 - roughly two months after ADIA's investment  The conversion price  was US$31.62 per share.  KIA has recently claimed a profit of US$1.1 billion.  Just in time for the interpellation sessions with the Majlis Al Umma.  You'll recall that earlier the MPs objected to the investment.   They say timing is everything! And that's not just investments but also politics.

Here's the WSJ article on KIA's US$1.1 billion profit.

So what happened?

As you'll recall, Citibank had an exchange offer mid year in connection with an "investment" by the US Government in its stock via the conversion of preferred shares.  Other preferred security holders were given the option of joining the deal. In fact it was a condition.  Uncle Sam agreed to match US$ for US$ any private sector conversions on these terms.  Some background here and here  and here.  In summary,  preferred securities could be exchanged for common shares at US$3.25 per share.  Citi was trading at approximately half that price at the time.

ADIA didn't participate in the exchange.  KIA did.

For the nominal value of its US$ 3billion of preferred stock, KIA would have gotten 923 million shares.   To reach the US$4.1 billion in sales proceeds mentioned in the articles, KIA would have had to sell at higher than the current US$4.06 per share.  Or  sell something over 1 million shares.  Perhaps it had an additional 86.8 million shares from capitalized preferred dividends?

Two questions remain:

1. Who bought KIA's stock?  At what price?
2. Can ADIA renegotiate its deal with Citi?  (It's unlikely the Citi's price is going to $31 in four months).
   

Global Kuwait to Sign Restructuring Agreement 10 December

AlQabas reports that Global reached agreement on the restructuring with its lenders 6 December.  A formal signing ceremony is slated for 10 December to be accompanied by a party and press conference.  The Governor of the Central Bank of Kuwait, Shaykh Salim AbdulAziz AlSabah,  has been asked to attend.

You'll recall that in yesterday's post on Global Ms. AlGhunaim had said that GIH had reached agreement with all but two of its creditors.

Good news for Global.

2-0 And I Am All "Stoked" Up

A victory and our backs to the 'Spurs.

Perhaps, Santa is responding to my latest letter.

Whatever the case,  another appeal. 

Red and White.

Aidan Birkett - Dubai World - Chief Restructuring Officer - Cultural Biases

An article from Maktoob Business on the cultural and other constraints to be faced by Birkett in Dubai.

If you read the article closely, you'll notice a strong undercurrent:  having made such a hash of things, the locals obviously can't be trusted to work their way out of the problem.   Culturally, they are just not up to it is the message.

So naturally we need to find an ex-region savior - preferably an expert from the West wearing a business suit.  To come in and sort things out.  To set the locals straight.  But will these incompetent locals let him save them from their follies goes the story?  Hence, the hand wringing over the obstacles in Mr. Birkett's path.  

But what should we then make of the recent "performance" in the more sophisticated financial centers  - the  subprime crisis, covenant lite loans, and assorted other manifest absurdities?  Where it should be  noted the amount of funds at risk in the Dubacle is but a rounding error in relation to the larger Western sums.

Will we soon be hearing calls for the dispatch of some sober looking chap in a thaub and ghutra to set the benighted fools in New York, London and other financial capitals straight?  Ever sensitive to the psychology of the less developed world, AA could suggest two Arab bankers who would arrive wearing business suits so as not to disturb local sensibilities in Europe or the States too much.  Dr. Naaman Al Azhari or Hassan Juma.   Let's hope that the locals' quaint but irritating folkways don't get in the way of  either of these khabir's work. 

It's important to be very clear about two things.

First, Mr. Birkett's position. 

He was hired as the Chief Restructuring Officer to come up with a restructuring plan. 

He is not the CEO to whom the CRO reports.  He is not the Board of Directors to whom the CEO reports.  He is not the shareholders to whom the Board reports.

He was not hired as a replacement for Shaykh Mohammad.  Nor did Shaykh Mohammad give him his shares in the company.

He is an employee.  He will give his advice and his client will either accept it or reject it.   In effect he is a mustashaar. 

Second, the capabilities of the locals in the GCC.

It's also important to understand that the people in the region and those in Dubai are no more a collection of incompetent fools than the financial titans in the West.  And no less able to take sage and sound advice.  And, yes, also subject to the same constraints that sometimes result in compromises between what should be done and what can be done.

Other Omani Banks Exposure to Dubai Inc

Again from Reuters.

1. Bank Dhofar - Nothing
2. National Bank of Oman - $22.6 million
   
3. Bank Sohar - US$4.3 million

Since HE Hamood Sangar AlZadjali, Governor of the CBO, said that the total exposure by Omani banks was US$77 million these disclosures plus that by Bank Muscat account for the total.   Again nothing here that will break any of these banks.

Abu Dhabi Commercial Bank US$2+ Billion Exposure to Dubai World

Reuters quotes an unnamed senior executive at ADCB:  "In the UAE, a senior executive at Abu Dhabi Commercial Bank told Reuters the bank had about $2.18bn to $2.45bn of exposure to Dubai World and related entities".

Strangely, this item was tucked away in one which described the US$77 million in exposure by Omani banks.

Ouch!  Painful but not fatal. 

At 30 September 2009 ADCB had some AED20.1 billion (US$5.5 billion) in capital.  It is also 65% owned by the Emirate of Abu Dhabi (which in case you don't know is the one with the money).    Message:  Abu Dhabi won't let ADCB fail.

Nothing on the ADX this morning from ADCB.  It would seem that having made this disclosure to the news media, ADCB would be following up with a public announcement.  Perhaps, this will occur before the ADX opens tomorrow?

Bank Muscat Exposure to Dubai - US$50 Million

OR19.25 million as per announcement on BSE.  Roughly US$50 million.

Not a major issue.  At 30 September 2009 the bank had OR709 million in shareholders funds.  It earned OR 20 million in 3Q09.

A bit of background on exposure of Bank Muscat and its Bahrain affiliate, Bank Muscat International,  to Saad/AlGosaibi.  If you look at Note #5 page 9 in the 3Q09 financials provided via the link above, you'll see a major increase in loans on which interest is being reserved from OR72.4 million  to OR196.6 million.  But this is only 5% or so of total loans.  And the loan loss reserve ("LLR")  covers 81% of this amount so the net uncovered amount is a mere 4% of equity. 

The Central Bank of Oman runs a rather tight ship - which is one of the reasons why Bank Muscat International in Bahrain was set up.  Expect additional provisions at Bank Muscat in 4Q09 to top up the LLR.