Felix Salmon

Dubai’s disabused creditors

By Felix Salmon
November 27, 2009

The Economist has a good short overview of the situation in Dubai, which includes this interesting take:

Investors had half-expected Dubai World to seek forbearance from its bankers, asking them to extend their loans. But they felt sure the emirate would make good on publicly traded instruments, and in particular Nakheel’s sukuk, rather than suffer further damage to its financial reputation.

I remember the days when investors felt that in the world of emerging markets, publicly-traded bonds were implicitly senior to bank loans. But those days came to an end in the late 1990s with bond defaults in Pakistan, Ukraine, and Ecuador — and they’ve never returned. And it’s not even obvious at this point that restructuring loans is easier than restructuring bonds.

Certainly any entity like Dubai World carrying a large amount of bank debt would be very wary about needlessly infuriating its bankers by defaulting to them while remaining current on its payments to bondholders. If Dubai World’s bondholders really took solace in the fact that they held bonds rather than loans, they thoroughly deserve a large hit in the wallet. And as Willem Buiter says, it’s a good thing too:

Property developers tend to be highly geared and very procyclical in their revenue flows and access to the capital markets. During construction slumps they drop like flies. Because the property sector is risky (ask Donald Trump), its creditors tend to get better interest rates than the sovereign rate. Dubai is no exception to this rule. If you earn a risk premium during good times, you should not moan when the borrower defaults from time to time when the going gets tough…

Property companies don’t fall into the systemically important category. Their collapse is painful for their shareholders, creditors and, if the local labour markets are weak, their employees. They are not, however, systemically important. Their collapse will not threaten the delicate fabric of financial intermediation. They are fit to fail. Creditors beware.

5 comments so far | RSS Comments RSS

“But they felt sure the emirate would make good on publicly traded instruments”"If Dubai World’s bondholders really took solace in the fact that they held bonds rather than loans, they thoroughly deserve a large hit in the wallet.”Perhaps the issue is neither bond nor loan (debt), but sukuk (equity), all three “publicly traded instruments”. But no one knows how sukuk would be handled by a default, especially bankruptcy. And THEN things begin to spill over into debt issues as the ripple effect takes hold.http://guambatstew.blogspot.com/200 9/11/on-inconvenience-of-principal.html


Isn’t this the company the Bush Adm. wanted to let take over a number of ports here in the U.S.?

Posted by tas | Report as abusive

So we’ve got an LSE biggie telling us that “Property companies don’t fall into the systemically important category.”Sorry, but I’m getting flashbacks to March ’07 when Susan Bies was running around describing the subprime market as a splinter off a sliver of a generally sound RE world. Looks like Nouriel’s gonna get that 3rd stroke of his “W” for Xmas.


remember the days you say Ecuador idiot default hahahha


The biggest problem with Roubini’s “W” is the assumption of the fourth leg.As Dr. Black noted, if I’m paying an interest rate that assumes a large chance of default, my willingness to default on that loan sooner than other financing should be assumed. (Brad DeLong keeps trying to argue against this; it’s roughly equivalent to Eugene Fama arguing that his EMH is not to blame for all of the structures that have been built on it [see P. Triana in the FT.)


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