The debt shenanigans at Dubai World are keeping analysts, investors and the financial media quite busy.
In the latest issue of Moody’s Weekly Credit Outlook, the rating agency estimates that Dubai World’s UAE-based creditor banks “would incur losses amounting to only around 9 per cent of their capitalization as of year-end 2009″ even if they had to swallow a 40 per cent haircut on their loans to the conglomerate.
As analyst John Tofarides puts it (emphasis ours):
(The 9% takes into account the exposures to DWG subject to restructuring.) This would hurt 2010 profits, but not jeopardize solvency.
As the DWG restructuring saga remains unresolved, market participants will continue to assume the worst, adding to the costs the affected banks may bear from potential write-offs. Although very few banks in the UAE have publicly disclosed their actual exposures to DWG entities, we have received sufficient information from most rated banks to conclude that the overall exposures of domestic banks to DWG entities are in the vicinity of AED55 billion, or $15 billion.
Also of interest in the note:
None of the rated banks is expected to be in breach of the minimum 8% regulatory Tier 1 ratio, even in the case of a 40% haircut loss on its DWG exposures.
Typically, Dubai-based banks are more exposed to DWG than banks from other emirates, though there are a few exceptions.
In the case of a 40% haircut, some banks will see their Tier 1 capital ratio fall below 11%, which is the minimum benchmark ratio set by the Ministry of Finance (MoF) as part of the conversion of the MoF’s deposits into Tier 2 loans. The implication is that the MoF may have the option to convert its Tier 2 loans into Tier 1 capital securities.
…
Moreover, a potential haircut loss could harm the ability of banks (especially Dubai-based banks) to tap the debt capital markets in a cost-effective manner without federal guarantees.
Related links:
Dubai CDS deja vu – FT Alphaville
Haircuts in Dubai – FT Alphaville
Buy-out groups circle Dubai asset sale – FT