One inevitable consequence of Abu Dhabi swooping to rescue its indebted neighbour is that some people will have made several large sacks of money.

Anyone who made bets on Nakheel 2011 bonds for example, which rallied on Monday by around 40 price points to an offer price of around 79, will be feeling rather smug.

Merrier still be those who bought the Nakheel 2009 sukuk at its lows, the bond that caused all the fuss in the first place and which is being repaid by Abu Dhabi:

But the happiest campers of them all could be Dubai World.

As Commerzbank emerging market debt strategist Luis Costa noted on Monday morning:

We wonder how much of the Nakheel 09s and 11s was bought back by Dubai World during this three-week period of intense price depression, without giving any re-assurance to bondholders. Difficult to imagine that the emergency rescue package was not known by the Dubai Financial Authority for at least a week or so.

While there was ultimately no traumatic Nakheel debt restructuring, investors suffered haircuts anyway due to lack of transparency in the debt negotiations.

Many would have sold, or been pressured to sell, amid the sound and fury following the Nakheel debt standstill request. Many will, no doubt, continue to fume about the way events unfolded.

So the Dubai bailout is little more than a sticking plaster. Restoring the emirate’s battered credibility will require significantly more effort – and international investors will demand a significantly higher risk premium to lend the emirate their cash in the future.

Nonetheless, markets on Monday are punch drunk on the news, with both the Abu Dhabi and Dubai benchmark indices moving sharply higher and the cost of credit protection for Dubai falling.

RTRS-DUBAI 5-YEAR DEBT INSURANCE COSTS FALL TO 417 BPS FROM 541 BPS FRIDAY CLOSE, 647 BPS NOV PEAK-CMA DATAVISION

10:15 14Dec09 RTRS-DP WORLD <DPW.DI> 5-YEAR CREDIT DEFAULT SWAPS FALL TO 436 BPS FROM 571 BPS FRIDAY CLOSE

RTRS-DUBAI INDEX <.DFMGI> ENDS UP 10.4 PCT, ITS LARGEST GAIN FOR 14 MONTHS ON ABU DHABI’S $10 BLN BAILOUT OF DUBAI

10:01 14Dec09 RTRS-ABU DHABI INDEX <.ADI> ENDS 7.9 PCT HIGHER, ITS BIGGEST 1-DAY GAIN SINCE AT LEAST APRIL 2007 AS DUBAI BAILOUT SENDS STOCKS SOARING

Related links:
Abu Dhabi steps in to bail out Dubai – FT
Statement From Sheikh Ahmad Bin Saeed Al Maktoum – FT Alphaville
Haircuts in Dubai – FT Alphaville

This entry was posted by Miles Johnson on Monday, December 14th, 2009 at 10:17 and is filed under Capital markets. Tagged with dubai world, Nakheel. Edit this entry.