Dubai debt insurance costs rise amid funding doubts

Dubai debt insurance costs rose on Friday as doubts surfaced about the emirate's ability to fund its share of a $9.5 billion plan to repay creditors of its struggling Dubai World conglomerate.

On Thursday Dubai unveiled its proposals to repay lenders to Dubai World in five to eight years and fully repay two bonds issued by its property developer unit Nakheel.

The $9.5 billion plan includes $5.7 billion previously lent by wealthy neighbour Abu Dhabi, with the remaining $3.8 billion coming from Dubai's own "internal resources".

But concerns about where Dubai would get the money helped push Dubai debt insurance costs back above 400 basis points, while the 2015 bond issued by the Dubai Department of Finance fell half a point.

"The terms are pretty positive, but now focus has shifted to the cash flow of Dubai government," said Okan Akin, RBS emerging markets analyst. "The $3.8 billion is supposed to be funded by the government, but this represents 40 percent of the Dubai government's revenues for 2009.

"The action will increase government borrowing going forward."

Dubai, which stunned markets last November with plans to delay repaying $26 billion in Dubai World debt, quickly ringfenced key assets such as ports operator DP World in a bid to protect them against claims by creditors.

Asset sales will be on the cards to raise cash, though officials said there was no immediate need for such a move.

"Assets inevitably will be disposed of at the right time, at the right value, at our choosing," said Aidan Birkett, Dubai World's chief restructuring officer.

But some assets are already being quietly shopped around or put on the auction block.

Dubai World's investment arm Istithmar has put its Inchcape Shipping Services unit up for sale and is looking for a $700 million price tag.

Dubai World, one of three holding companies controlled by Dubai, also owns US luxury retailer Barneys, a stake in entertainment group Cirque du Soleil, the QE2 luxury ocean liner and Scotland's Turnberry Golf course.

Khuram Maqsood, managing director at Emirates Capital in Dubai, said the plan may be relying on the market turning in Dubai's favour - both for future asset sales and real estate recovery - neither of which could be counted on.

Thursday's plan was surprising in that it included no further cash from Abu Dhabi.

"Dubai has other debts coming due in addition to Dubai World," Maqsood said. "Unless in their plan they have assumed a lot of good things breaking in their favour ... Abu Dhabi will step in, because how else are they going to fill the gap?

"Or what's going to happen is another agonising round of discussions with lenders, saying 'Sorry, our bad again.'"

Dubai's other high-profile assets include Emirates airline and, through various holding companies, stakes in foreign companies such as HSBC, Deutsche Bank and London Stock Exchange.

Five year credit default swaps (CDS) for Dubai were quoted at 405 basis points on Friday by CDS tracker CMA DataVision, up 3 bps from Thursday's close.

This is a jump of 45 bps from earlier on Thursday when CDS fell to their lowest since Nov 24, 2009 - a day before the emirate stunned financial markets with a debt repayment standstill.

While the 2014 Islamic bond issued by the Dubai department of Finance fell 0.450 points in price with the yield up 11.6 bps.

"The finances of the government of Dubai itself remain stretched and, in fact, appear to be put under greater near-term strain by the terms of the proposed restructuring agreement," HSBC said in a research note.

But bonds on Dubai World subsidiary Nakheel continued to rise. The dirham-denominated Islamic bond due May 2010 was quoted with a bid/offer of 94/97 after trading at 94.75 on Thursday, the highest since July 2008.

The January 2011 dollar issue rose half a point.

In a surprise move, Dubai said on Thursday it would pay off the Nakheel 2010 and 2011 bonds, or sukuk, when they come due, if creditors agree its broader proposal to restructure $26 billion in debt linked to Dubai World.

Dubai's finance chief said on Friday the emirate said the bond repayment would avoid "potential complexities", and there was no preferential treatment for bondholders over other creditors.