Wednesday, February 25, 2009

What about the second $10 billion?

On Sunday, Dubai announced that it had secured a $10 billion loan from Abu Dhabi and would issue another $10 billion in the private market. The loan covered short term borrowing that was coming due.

Forbes reports on developments since Sunday:
The announcement sent stocks soaring nearly 8.0% on Monday, eased spreads on credit-default swaps and was cheered by business leaders and beaming politicians splashed across the pages of the UAE's newspapers.

But by Wednesday, the mood in Dubai dimmed. Most of Monday's gains had been clawed back....

The backlash after the initial surge may represent the many unanswered questions surrounding the so-called "bailout" of Dubai. The emirate said on Wednesday it would use the $10.0 billion on a case-by-case basis to help wholly or partly state-owned companies repay short-term debts. But to truly restore investor confidence, a more comprehensive stimulus package with direct intervention in the real-estate and mortgage-lending markets would be needed....

As for the second $10.0 billion chunk Dubai said it planned to raise on Sunday -- presumably by issuing five-year bonds on the open market, rather than sealing another Abu-Dhabi deal -- speculation was mounting Wednesday that this would not take place until 2012 or even 2013. Nomura's Riley told Forbes that with a planned coupon rate of 4.0%, such a bond issue would not be warmly greeted in the current environment. Although this yield is still higher than for sovereign debt issued by Britain, Germany or the U.S., 4.0% does not price in the full extent of comparable risk.
That the "4.0% does not price in the full extent of comparable risk" is further evidence that Abu Dhabi's loan to Dubai -- via proxy through the Central Bank -- is a bailout.

Ouch - "Former Gulf boom town":
Dubai said on Wednesday $10 billion in bond proceeds from the United Arab Emirates central bank would be enough for now to help state-linked firms settle debts and restructure to tackle an economic downturn.

The former Gulf boom town would give loans on a case-by-case basis to wholly or partly state-owned companies looking to repay debts maturing this year as well as to meet other commitments, said Nasser al-Shaikh, director-general of Dubai's Department of Finance.
Companies tapping the support fund would have to pay back the loans at a price at least equal to the 4 percent Dubai is paying on the bonds, and repay the loans once the financial climate improves, he said.

The mechanism was still being worked out but cash could be lent directly to firms or through banks, Shaikh said, adding that using the entire $20 billion would be the 'worst-case scenario'.
The fixed rate of interest doesn't sound like Islamic finance to me -- Dubai doesn't appear to be willing to share ownership with Abu Dhabi. On the other hand, at least by the market's reckoning, Abu Dhabi is taking a clear downside risk. Just what it will possess if Dubai is unable to pay is unclear.


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