Dubai World doubts weigh on debt insurance costs

Uncertainty about state-owned Dubai World's $22 billion debt restructuring is starting to weigh on the credit again, pushing up bond yields and Dubai's debt insurance costs, just six weeks after a multi-billion dollar bailout by neighbouring Abu Dhabi.

Dubai World stunned markets when it announced a debt payment standstill at the end of November. A $10bn bail-out by Abu Dhabi has allowed the company to continue to make debt payments, but it has yet to reach a formal standstill agreement with creditors.

Five-year credit default swaps (CDS) for Dubai have risen sharply in the past week and are now quoted at 510 basis points, up about 45 bps on the week, meaning it costs over half a million dollars a year to insure $10 million of the emirate's debt for a five-year period.

"Since the Dubai World statement which came out of the blue, we have not had any sort of clarity as to how the talks are progressing, we have not had any statements or any proposals," said Nish Popat, head of fixed income at ING Investment Management Middle East in Dubai.

"We are hearing they are still talking to the banks, but it's been two months and there is still this uncertainty and lack of clarity."

The CDS surge back to levels seen just before the mid-December bailout is fuelling a rise in debt insurance costs, albeit on a smaller scale, for other regional corporates and names such as Abu Dhabi and Bahrain, according to prices from CDS monitor CMA DataVision.

Analysts say the rise comes against the backdrop of wobbly global equity markets and the debt crisis in Greece and other euro zone peripherals.

But they said a recent move by Standard & Poor's to withdraw its rating for Dubai Holding Commercial Group (DHCOG), owned by the emirate's ruler, had hit sentiment for the region.

"We don't think headlines will go back to the emergency mode in the coming quarters but clearly people are cautious because there is some danger of debt rescheduling," said Luis Costa, emerging debt strategist at Commerzbank.

"The $10bn package from Abu Dhabi means Dubai World can plug refinancing for 2010, but huge chunks of refinancing remain still for 2011."

Dubai World subsidiary Nakheel has a domestic bond which matures on May 13, a focus of attention for investors. Dubai World subsidiary Nakheel's $750 million sukuk due January 2011 is trading at 55, giving a yield of 79 per cent.

The yield has risen sharply in the past few weeks, but analysts say it may have further to go.

"The market is assigning too high recovery valuations to Nakheel," said Milena Ianeva, strategist at Barclays Capital.

"The Nakheel 11s trading 56-57 and Nakheel 10s at 63-68 are still well above our estimated recovery value of 40-50."

Concern about Dubai World is also hitting other Dubai corporates such as Dubai Holding.

Dubai Holding's $500m bond due 2012 is trading at 65, giving a yield of 23 per cent, compared with an 18 per cent yield in mid-January.

However, Costa forecast $10bn in net international bond issuance in the region this year, with issuers such as Bahrain and Abu Dhabi expected to tap capital markets.

Bahrain plans to issue a $1bn 10-year sovereign bond, which will also be available for sale in the US, the central bank said last month.