November 26, 2009
For a place where the widespread use of postdated cheques represents a dangerous form of unofficial, unregulated credit expansion; and bouncing such cheques is a criminal offense (interesting comments at the foot of this TimeOut Dubai piece) it is painfully ironic that the Emirate now requests a little understanding on a cultural more as sensitive as that of the importance of honouring one's obligations.
Barclays Capital will certainly wonder about Fate's sharp gag writers. A scant 3 weeks ago they considered Dubai sovereign debt "attractively priced at current levels". Well, it's an even bigger bargain today (excluding insurance costs described by some as "overblown").
Barclays, along with Credit Suisse, Lloyds, HSBC (seen last month describing the debt liabilities of related Dubai government companies as "reasonable"), Royal Bank of Scotland and Deutsche Bank, is one of the lenders caught in the dilemma of finding a way through potential losses whilst maintaining precious (for future business) relational ties. And talking its own book does not seem to have done the trick.
In sum, this might prove a story just getting started as both the US Thanksgiving and Islamic Eid al-Adha breaks guarantee that matters marinate until next week.
from apital-chronicle.com
Wednesday, 2 December 2009
The Debacle in Dubai
November 27, 2009
I was a guest on two shows, BBC News' "World News Today" and Fox Business News' "Cavuto," where I discussed the fallout from news that Dubai will delay repayments on $60 billion of debt from its investment company, Dubai World (videos embedded below).
As I see it, the turmoil that has occurred in global markets over the past 48 hours essentially confirms that investors in risky asset classes have not made allowances for surprises -- or even predictable events. In fact, it seems pretty clear that during the past nine months or so, many people have (again) come to believe they can achieve high returns with little or no risk.
Dubai's effective default also shines a light on another concern that economists, policymakers, and permabulls have largely pooh-poohed: the scale of and, especially recently, the rapid rise in public sector debt loads and the long, dark shadow these obligations cast over the economic and financial landscape.
Not surprisingly, as with the subprime crisis, clueless "strategists" are already suggesting that because of the sums involved (the ones we know about, at least) and the relatively small number of banks that are directly affected, the fallout will be limited -- remember the 2007 buzzword, "contained"? -- and that recent developments will be shrugged off. Yeah, right.
But in reality, the Dubai debacle underscores the fact that many consumer, corporate, and public sector balance sheets around the world remain impaired or overextended, despite -- or because of -- the rescues, bailouts, stimulus programs, and monetary easings that have occurred so far. In the end, this state of affairs represents a major barrier to any sort of meaningful recovery.
I was a guest on two shows, BBC News' "World News Today" and Fox Business News' "Cavuto," where I discussed the fallout from news that Dubai will delay repayments on $60 billion of debt from its investment company, Dubai World (videos embedded below).
As I see it, the turmoil that has occurred in global markets over the past 48 hours essentially confirms that investors in risky asset classes have not made allowances for surprises -- or even predictable events. In fact, it seems pretty clear that during the past nine months or so, many people have (again) come to believe they can achieve high returns with little or no risk.
Dubai's effective default also shines a light on another concern that economists, policymakers, and permabulls have largely pooh-poohed: the scale of and, especially recently, the rapid rise in public sector debt loads and the long, dark shadow these obligations cast over the economic and financial landscape.
Not surprisingly, as with the subprime crisis, clueless "strategists" are already suggesting that because of the sums involved (the ones we know about, at least) and the relatively small number of banks that are directly affected, the fallout will be limited -- remember the 2007 buzzword, "contained"? -- and that recent developments will be shrugged off. Yeah, right.
But in reality, the Dubai debacle underscores the fact that many consumer, corporate, and public sector balance sheets around the world remain impaired or overextended, despite -- or because of -- the rescues, bailouts, stimulus programs, and monetary easings that have occurred so far. In the end, this state of affairs represents a major barrier to any sort of meaningful recovery.
Dubai Won't guarantee debts of DW
November 30, 2009
This is starting to get interesting. One of the problems of doing business in the Middle East is that the the boundary between the private business of the ruling families and state matters is often murky. Dubai World is forcing a some clarification, and the line is being drawn to cut off the real estate developer.
We had noted last night that the Abu Dhabi backstop was limited to banks, and thus appeared to exclude Dubai World. The Dubai action presumably reflects the stance of Abu Dhabi.
The implication is that other “commercial” developments that might have been assumed to be state backed will be seen in a different light.
From the Financial Times:
Dubai’s government will not guarantee the debts of Dubai World, the state-owned holding company struggling under the weight of $59bn in liabilities, arguing that lenders were mistaken to think that there was sovereign backing.
Abdulrahman al-Saleh, department of finance chief, said creditors were responsible for their own lending decisions and should differentiate between companies and the state.
“Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct,” Mr Saleh said.
Mr Saleh’s comments underscored the government’s intention to cut Dubai World adrift and raised questions over whether it would distance itself from other parts of the emirate’s commercial empire.
Dubai World on Monday night unveiled details of how a restructuring of its debt might proceed.
“The total value of debt carried by the companies subject to the restructuring process amounts to approximately $26bn, of which approximately $6bn relates to the Nakheel sukuk [Islamic bonds from the property arm],” a company statement said.
“Initial discussions have commenced with the banks of Dubai World and are proceeding on a constructive basis,” it said. The efforts would not include other firms, which it said were financially stable, such as Infinity World Holding, Istithmar World and Ports Free Zone World, which includes DP World , Economic Zones World, P&O Ferries and Jebel Ali Free Zone, or JAFZA.
In a note to clients, RBC Capital Markets said Dubai World bondholders had “almost no legal legs to stand on” to recover the value of their investments from the government in the event of a default.
“We now have to look at each Dubai entity on its own merits and cash flows,” said one other banker. “The mood is really crummy, and it’s not just Dubai government risk, we have to be worried about healthy corporates with exposure to companies like Nakheel [Dubai World’s property arm] too.”…
Rachid Mohamed Rachid, Egypt’s trade and industry minister, warned that “the Dubai situation will have serious consequences for the region”…
Five-year credit default swaps for Dubai widened on Mr Saleh’s comments, after earlier tightening on UAE central bank intervention announced on Sunday.
Mr Saleh said creditors of Dubai World would be affected in the short term but claimed there would be long-term benefits as the government restructured the business.
Nakheel asked for all three of its sukuk worth $5.25bn to be suspended from trade, while Dubai World paid a coupon on another sukuk issued by the Jebel Ali Free Zone Authority, the industrial park next to Dubai’s largest port.
This is starting to get interesting. One of the problems of doing business in the Middle East is that the the boundary between the private business of the ruling families and state matters is often murky. Dubai World is forcing a some clarification, and the line is being drawn to cut off the real estate developer.
We had noted last night that the Abu Dhabi backstop was limited to banks, and thus appeared to exclude Dubai World. The Dubai action presumably reflects the stance of Abu Dhabi.
The implication is that other “commercial” developments that might have been assumed to be state backed will be seen in a different light.
From the Financial Times:
Dubai’s government will not guarantee the debts of Dubai World, the state-owned holding company struggling under the weight of $59bn in liabilities, arguing that lenders were mistaken to think that there was sovereign backing.
Abdulrahman al-Saleh, department of finance chief, said creditors were responsible for their own lending decisions and should differentiate between companies and the state.
“Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct,” Mr Saleh said.
Mr Saleh’s comments underscored the government’s intention to cut Dubai World adrift and raised questions over whether it would distance itself from other parts of the emirate’s commercial empire.
Dubai World on Monday night unveiled details of how a restructuring of its debt might proceed.
“The total value of debt carried by the companies subject to the restructuring process amounts to approximately $26bn, of which approximately $6bn relates to the Nakheel sukuk [Islamic bonds from the property arm],” a company statement said.
“Initial discussions have commenced with the banks of Dubai World and are proceeding on a constructive basis,” it said. The efforts would not include other firms, which it said were financially stable, such as Infinity World Holding, Istithmar World and Ports Free Zone World, which includes DP World , Economic Zones World, P&O Ferries and Jebel Ali Free Zone, or JAFZA.
In a note to clients, RBC Capital Markets said Dubai World bondholders had “almost no legal legs to stand on” to recover the value of their investments from the government in the event of a default.
“We now have to look at each Dubai entity on its own merits and cash flows,” said one other banker. “The mood is really crummy, and it’s not just Dubai government risk, we have to be worried about healthy corporates with exposure to companies like Nakheel [Dubai World’s property arm] too.”…
Rachid Mohamed Rachid, Egypt’s trade and industry minister, warned that “the Dubai situation will have serious consequences for the region”…
Five-year credit default swaps for Dubai widened on Mr Saleh’s comments, after earlier tightening on UAE central bank intervention announced on Sunday.
Mr Saleh said creditors of Dubai World would be affected in the short term but claimed there would be long-term benefits as the government restructured the business.
Nakheel asked for all three of its sukuk worth $5.25bn to be suspended from trade, while Dubai World paid a coupon on another sukuk issued by the Jebel Ali Free Zone Authority, the industrial park next to Dubai’s largest port.
Dubai Crisis Tests Laws of Islamic Financing-From NYT
December 1, 2009
By HEATHER TIMMONS
NEW DELHI — The debt crisis in Dubai is about to test one of the fastest-growing areas in banking, Islamic finance, and put the city-state’s opaque judicial system on trial, according to bankers and experts in finance.
Many loans and bonds that comply with Shariah, or Islamic law, were issued in recent years by Dubai World, the investment arm of Dubai, and other Persian Gulf companies as oil-rich Middle East nations increased spending, and the global credit crisis fed debt investments in emerging markets.
But, because there have been few major defaults in this market, there is little precedent for arbitrating the unique terms of these instruments.
That is likely to create many legal issues for investors in Dubai World, which sent jitters through global markets by seeking to delay payments on $59 billion in debt. Abdulrahman al-Saleh, director general of Dubai’s finance department, said Monday that Dubai World was not guaranteed by the government, and the creditors would need to “bear some of the responsibility” for the company’s debt.
Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London.
The first test of what that means for investors may happen around Dec. 14, when payments on a $3.5 billion Shariah-compliant bond owed by Dubai World’s real estate subsidiary, Nakheel, come due. If Nakheel defaults on its payment, legal proceedings may be initiated.
It is unclear what may happen next. Nakheel bondholders have formed a creditors’ group representing more than 25 percent of the outstanding debt, a legal adviser to the group said Monday.
Holders of these bonds “are going to argue that they are in the secured position on the underlying asset,” said one bank investor involved in the issuance of some of Dubai’s Shariah-compliant debt. That means that bondholders could insist on being repaid before banks, upending the traditional bankruptcy hierarchy.
“No one has tested the legal system or the documentation,” a lawyer briefed on the situation said.
The 237-page prospectus for the Nakheel bond provides little clarity. In the case of a bankruptcy by Dubai World or Nakheel, bondholders have no guarantee of “repayment of their claims in full or at all,” it said. Under Dubai law, it added, no debt owed by the ruler or government can be recovered by taking possession of the government’s assets.
A default would also pose a major new test for Dubai’s courts, which have never handled a major bankruptcy of one of the government’s own companies, lawyers and bankers said.
Unlike its neighbors, Dubai has kept its judiciary system separate from the United Arab Emirates Federal Judiciary Authority. The decisions of the Dubai courts, which are controlled by the emirate’s ruling family, can be fickle, say lawyers in the region.
For example, in order to bring a court case against a government-owned or government-run entity, a corporation or individual needs to get permission — from the government. In the prospectus for Nakheel bonds, investors are warned that “judicial precedents in Dubai have no binding effect on subsequent decisions,” and that court decisions in Dubai are “generally not recorded.”
Global issuance of Shariah-compliant bonds and loans grew 40 percent in the first 10 months of 2009 from a year ago, Moody’s Investors Services said in a November note to clients. The total amount of Shariah-compliant debt outstanding is estimated at about $1 trillion, up from $700 billion just two years ago. About 10 percent of Dubai’s $80 billion debt load complies with Shariah, bankers and analysts estimate.
Malaysia was traditionally the hub of Islamic finance, but much of this new activity has been centered around Dubai, and foreign and local law firms and banks there helped the emirate raise much of its debt. Dubai even has a school that turns students into “certified Islamic finance executives,” whose stamp of approval is required for an instrument to be deemed Shariah-compliant.
The surge in Islamic finance has led to hiring sprees at banks, and given rise to a series of new financial indicators like the Dow Jones Islamic Market index. Hoping to appeal to the Middle East’s huge sovereign wealth funds, even non-Islamic institutions have started to raise money using Islamic finance.
In October, the British Treasury drew up rules that would soon allow Britain to issue Shariah-compliant government debt. The same month, the World Bank issued $100 million in Shariah-compliant bonds.
By HEATHER TIMMONS
NEW DELHI — The debt crisis in Dubai is about to test one of the fastest-growing areas in banking, Islamic finance, and put the city-state’s opaque judicial system on trial, according to bankers and experts in finance.
Many loans and bonds that comply with Shariah, or Islamic law, were issued in recent years by Dubai World, the investment arm of Dubai, and other Persian Gulf companies as oil-rich Middle East nations increased spending, and the global credit crisis fed debt investments in emerging markets.
But, because there have been few major defaults in this market, there is little precedent for arbitrating the unique terms of these instruments.
That is likely to create many legal issues for investors in Dubai World, which sent jitters through global markets by seeking to delay payments on $59 billion in debt. Abdulrahman al-Saleh, director general of Dubai’s finance department, said Monday that Dubai World was not guaranteed by the government, and the creditors would need to “bear some of the responsibility” for the company’s debt.
Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London.
The first test of what that means for investors may happen around Dec. 14, when payments on a $3.5 billion Shariah-compliant bond owed by Dubai World’s real estate subsidiary, Nakheel, come due. If Nakheel defaults on its payment, legal proceedings may be initiated.
It is unclear what may happen next. Nakheel bondholders have formed a creditors’ group representing more than 25 percent of the outstanding debt, a legal adviser to the group said Monday.
Holders of these bonds “are going to argue that they are in the secured position on the underlying asset,” said one bank investor involved in the issuance of some of Dubai’s Shariah-compliant debt. That means that bondholders could insist on being repaid before banks, upending the traditional bankruptcy hierarchy.
“No one has tested the legal system or the documentation,” a lawyer briefed on the situation said.
The 237-page prospectus for the Nakheel bond provides little clarity. In the case of a bankruptcy by Dubai World or Nakheel, bondholders have no guarantee of “repayment of their claims in full or at all,” it said. Under Dubai law, it added, no debt owed by the ruler or government can be recovered by taking possession of the government’s assets.
A default would also pose a major new test for Dubai’s courts, which have never handled a major bankruptcy of one of the government’s own companies, lawyers and bankers said.
Unlike its neighbors, Dubai has kept its judiciary system separate from the United Arab Emirates Federal Judiciary Authority. The decisions of the Dubai courts, which are controlled by the emirate’s ruling family, can be fickle, say lawyers in the region.
For example, in order to bring a court case against a government-owned or government-run entity, a corporation or individual needs to get permission — from the government. In the prospectus for Nakheel bonds, investors are warned that “judicial precedents in Dubai have no binding effect on subsequent decisions,” and that court decisions in Dubai are “generally not recorded.”
Global issuance of Shariah-compliant bonds and loans grew 40 percent in the first 10 months of 2009 from a year ago, Moody’s Investors Services said in a November note to clients. The total amount of Shariah-compliant debt outstanding is estimated at about $1 trillion, up from $700 billion just two years ago. About 10 percent of Dubai’s $80 billion debt load complies with Shariah, bankers and analysts estimate.
Malaysia was traditionally the hub of Islamic finance, but much of this new activity has been centered around Dubai, and foreign and local law firms and banks there helped the emirate raise much of its debt. Dubai even has a school that turns students into “certified Islamic finance executives,” whose stamp of approval is required for an instrument to be deemed Shariah-compliant.
The surge in Islamic finance has led to hiring sprees at banks, and given rise to a series of new financial indicators like the Dow Jones Islamic Market index. Hoping to appeal to the Middle East’s huge sovereign wealth funds, even non-Islamic institutions have started to raise money using Islamic finance.
In October, the British Treasury drew up rules that would soon allow Britain to issue Shariah-compliant government debt. The same month, the World Bank issued $100 million in Shariah-compliant bonds.
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