After Abu Dhabi pledged $10 billion to help Dubai World pay off its $4.1 billion sukuk (an Islamic bond) commitments, global markets revived and the Gulf seemed to breathe a sigh of relief. But much of the damage to Emirati banks has already been done, with ratings slipping by the week and — market fluctuations aside — for foreign banks the worst may be yet to come.
The $10 billion covers the $4.1 billion in principal plus interest that was due on December 14, along with further interest payments due until April 30, with some funds still left over for working capital.
But Dubai World creditors still cannot be sure that they will get what is owed to them when their turn comes. Those banks without exposure to Dubai World were quick to spread this news and those with anything more than marginal exposure seem content to hide their heads in the desert sand.
Although small disclosures of exposure have been trickling into local media, especially in Asian markets, major creditors appear to be in a holding pattern while the restructuring details are determined.
Now that Nakheel’s first bond has been paid, all the banks can do is to “see if the other bonds default or whether they will be addressed in an anticipatory manner,” said Raj Madha, director of equity research at the investment bank EFG–Hermes.
In the meantime, a thorough look at Dubai World’s creditors can show who is counting most on these decisions and who, therefore, will most likely play the largest role behind the locked-door meetings between Dubai World, Dubai’s ruling class and roughly 100 creditors, that will follow in the coming weeks and months.
Debts at home…
In its December 14 statement, the government of Dubai expressed concern for local creditors, saying it was mainly focused on repaying local trade creditors and ensuring the security of the United Arab Emirates’ banks. While Emirati banks are expected to be highly exposed, disclosure remains extremely limited. So far the only banks reporting exposure are Abu Dhabi Commercial Bank, at $1.9 billion, First Gulf Bank with at least $1.36 billion in exposure and National Bank of Abu Dhabi with $345 million.
Many Dubai and Abu Dhabi banks saw ratings drop in the weeks following the original announcement of the requested debt standstill, despite the liquidity facility offered by the UAE Central Bank until March.
Fitch Ratings was the first to the plate, slashing the ratings of Dubai Bank, Tamweel PJSC and Bahrain’s TAIB Bank on November 27 2009, giving Dubai Bank and TAIB Bank outlooks of “negative” and placing Tamweel on ratings watch for further decline. Standard and Poor’s came next, downgrading Emirates NBD, Dubai Islamic Bank and Mashreq Bank on December 3. Moody’s also downgraded the same three banks on December 12.
On December 16, Fitch Ratings announced that Commercial Bank of Dubai, Emirates NBD, Mashreq Bank, HSBC Middle East and Dubai Bank would remain on ratings watch negative “allowing for more information to arise and for the agency to review all of the rated banks’ audited financial statements.” The company’s statement said this review period would last for two to three months.
Robert Thursfield, director of financial institutions for Fitch Ratings, said they were not receiving full disclosure from the banks in question.
“It is part of the equation. Some banks have given us the information and some haven’t, but it’s also just giving more time for things to develop generally,” he said.
Even before the Dubai World announcement demolished markets and sent bankers rushing to tabulate their possible losses, Emirates NBD, one of the banks to see its ratings cut of late, had delayed a bond sale scheduled for early 2010 in anticipation of a rally in bond rates arriving as Dubai’s economy recovered from the credit crisis — this rally is no longer expected.
Mashreq, the largest privately owned bank in the UAE, was downgraded to “non-investment grade,” better known as “junk status.” Mashreq also disclosed that it is owed a total of $560 million by Saad Group and A.H. Algosaibi & Bros, the two Saudi family conglomerates embroiled in lawsuits over fraud allegations.
Exposure disclosure
Abu Dhabi Commercial Bank, which is reported to have one of the highest exposures worldwide, is on ratings watch as of December 15, according to Moody’s, along with the bank’s finance subsidiary. Commercial Bank of Dubai and Dubai Bank are also on Moody’s watch list.
But the news is not all bad. After the initial payment of Nakheel’s December 14 sukuk, Goldman Sachs raised investment ratings on National Bank of Abu Dhabi and First Gulf Bank to “buy.”
“Dubai is deleveraging and ironing out the excesses it has accumulated over the years, effectively shifting the UAE’s growth axis more toward Abu Dhabi,” said William Mejia, executive director at Goldman Sachs, in a December 17 press release.
Around the rest of the Gulf, exposure appears to be relatively low, with Kuwaiti institutions reporting $120 million of exposure, Qatar Islamic Bank reporting just $14.84 million and Oman’s banks totaling $77 million in exposure to Dubai World. Bahrain’s Central Bank governor has said that Bahraini banks have $281 million in exposure, though individual banks have released no figures.
Lent from afar
Though British banks have the second highest exposure next to the UAE, they are not expected to see similar ratings cuts.
“Fitch does not expect any United Kingdom banking group’s exposure to these companies to be, in
itself, of sufficient size to affect its ratings,” said the ratings agency just days after the Dubai World near default announcement.
But foreign exposure is significant, in the sense that European and some Asian banks may have more to recover than their share prices.
Still, Dubai’s leaders have been reacting strongly to the international media frenzy.
“It has made a bigger splash in the world media than Lehman Brothers did going down, and yet its debt is the equivalent to that of a single European Bank. And we have oil, they don’t,” said Sheikh Maktoum Hasher Maktoum Juma al-Maktoum, chief executive officer of Al Fajer Group, at the Arabian Business Conference in December.
In some part, this is true. Many of the banks, which early in the news cycle were expected to have high exposure, have come out with statements to the contrary — though, of course, we can only take them at their word.
French banks were expected to be hit hard upon the announcement, but exposure in France appears to be relatively low. Natixis reported $50 million in exposure. BNP Paribas, Calyon, Dexia and Societe General have all reported reasonable, limited or low exposure without releasing figures. Deutsche Bank, another European heavy hitter, was also expected to have high exposure but has since stated it is free and clear.
The requested standstill has not only floored investor confidence in the financial health of Dubai, but also in the country’s ruler and the assumed guarantees behind a government-owned conglomerate such as Dubai World.
“We would argue that the situation in Dubai is somewhat unique in that the guarantees that may have been perceived to exist in the case of Dubai World were neither explicit nor sovereign,” said Deutsche Bank in a November 26 report. “The market may have assumed Dubai’s government backed the companies it owned, even though there were no explicit guarantees and Dubai had no material revenue sources of its own.”
Beside seeing a drop in investment and bond demand, banks acting as bookrunners for Dubai bond sales may run for the hills as well. HSBC, ING, Lloyds, Mashreq, Royal Bank of Scotland, Sumitomo Mitsui, Calyon and Tokyo Mitsubishi have all been employed as facilitators of Dubai World’s $5.5 billion in syndicated loans, which is part of the $26 billion in debt set to be restructured, according to Bloomberg. Bookrunners usually hold onto 10 to 20 percent of a bond and syndicate the rest to various lenders.
High noon
Dubai World officials are set for a showdown with nearly 100 creditors. Standard Chartered, HSBC, Lloyds, Royal Bank of Scotland, and local lenders Emirates NBD and Abu Dhabi Commercial Bank make up the steering committee on the creditor side, and the banks have hired Swiss auditing firm KPMG to audit proposals from Dubai World. Aidan Birkett of Deloitte & Touche, another Swiss auditor, will act as the chief restructuring officer for Dubai World, while investment banks Moelis & Co. and Rothschild will serve as additional advisors.
Though many possible scenarios are being thrown around, the sole consensus is that this process will take time.
