My, my, what a difference a few weeks make.
Earlier this month — when all still seemed relatively well in the UAE emirate of Dubai — Barclays Capital was among those touting Dubai-related debt as a decent investment for clients. The bank even confidently predicted the repayment of the now infamous Nakheel sukuk.
In fact on November 4 — the day Moody’s slashed its ratings on five Dubai government related entities — BarCap analysts wrote:
We expect several developments to act as positive catalysts for Dubai’s sovereign spreads. First, the likely repayment of the Nakheel sukuk in December. Second, Dubai’s ability to raise the second USD10bn tranche with the support of Abu Dhabi. Third, a successful conclusion of the merger between Emaar and Dubai Holding, as well as a solution allowing mortgage providers Amlak and Tamweel to resume lending.
On that basis, we recommend a long position in Dubai sovereign credit and see today’s negative price actions as an opportunity to buy. While the newly issued sukuk is our preferred instrument, we also feel comfortable in a recommendation to sell 5y CDS outright or against the CDX EM Index in a relative value trade.
Moody’s, by the way, had warned Dubai’s government was under no obligation to extend support to any government-related issuers either directly or through the support fund. They also wrote:
“Moody’s is therefore making a greater distinction between its view of the creditworthiness of Dubai’s GRIs and that of the Dubai central government, which is itself viewed by Moody’s as benefiting from support from the U.A.E. federal government.”
Unsurprisingly then when you fast forward to November 25 there’s been a bit of a self-acknowledged u-turn from BarCap on the issue of Dubai debt. As they wrote in a note on Wednesday:
Today’s news carries a series of unexpected and surprising headlines when the Dubai Government announced that Dubai World will ask creditors for a standstillagreement to extend the maturities of all debt repayments by Dubai World andits property unit Nakheel until May next year. This announcement fundamentally changes our views expressed in our latest notes in November.
Adding:
Today’s statements are relatively confusing and could underestimate marketreaction to the broader set of liabilities of UAE entities. In particular, as spreadswere widening on the back of an imminent default scenario by the largest bondissuer in Dubai, another Dubai government entity, with significant financing needs was announcing its willingness to issue.
On the back of today’s developments, we reassess our view towards Dubai as a whole. Fundamentals remain challenging and with uncertainty around the support and political agenda of Abu Dhabi concerning Dubai Inc, spread levels do not seem justified.
The credibility of Abu Dhabi to support Dubai with respect to its financing needs is dented, in our view, eroding the main pillar of Dubai’s creditworthiness.Dubai’s 5y CDS spreads widened by about 130bp when the news emerged, alsosending jitters through wider markets.
The uncertainty and unpredictability around upcoming debt repayments impliedby today’s events will add to pressures on Dubai spreads, which may lead to a re-pricing of Dubai and UAE risk, in our view. For the further financing needs ofDubai, today’s announcements imply an increased dependence on Abu Dhabi, asinternational investors are likely to be much less receptive for Dubai paper than they have been lately.
Well, well. Who’d have thought, eh?
Related links:
Dubai: the Kerzner International connection - FT Alphaville
“For the general purposes of the Dubai Financial Support Fund…” - FT Alphaville
“The Sun Never Sets on Dubai World.” Really? – FT Alphaville
Dubai World asks for debt ‘standstill’ – FT