Monday, February 23, 2009

Dubai receives federal bailout

Wall Street Journal:
The effective bailout will be structured as a long-term bond, the governments of Dubai and the UAE said in separate statements late Sunday.
...
Amid the real-estate carnage and the uncertainty over a bailout, debt investors drove up the cost of insuring Dubai against default. Although the market is a small and illiquid one, the cost of insuring $10 million worth of Dubai-related debt for five years soared recently to over $1 million per year, about what it costs to insure Icelandic debt.

Then last week, Dubai eased worries somewhat by paying down and refinancing a big loan that was coming due. Borse Dubai, a government-controlled holding company, borrowed $3.8 billion last year to finance its purchase of a 20% stake in Nasdaq OMX Group Inc. nternational banks, however, only provided modest refinancing, forcing Dubai's government to step in and pony up the difference, some $2.2 billion, according to people familiar with the deal.
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In a statement late Sunday, the Dubai government said it would issue $20 billion in long-term bonds. The statement said the first tranche of the facility -- $10 billion worth -- was fully subscribed by the UAE's central bank.

The bond will be unsecured, fixed-rate paper, yielding 4% per year, with a five-year maturity, the government said. The UAE's state media confirmed the deal in a separate statement.
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...the publicly disclosed terms of the deal late Sunday suggest Abu Dhabi was willing to extend its loan with no strings attached, at least for the time being.
My emphasis. Let's make no bones about it. This is a bailout.

In the current worldwide environment of distrust, it's pretty clear the market did not believe Dubai would be able to pay. Abu Dhabi's action is meant to boost confidence that the second tranche is a solid investment -- that if Dubai doesn't pay then Abu Dhabi will. This may be where the strings are hidden.

Other reports: Emirates 24/7 | The National | Gulf News | Financial Times

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