Global Investing

Dubai banks feeling the heat

April 19, 2012

More than two years on from Dubai World, and Dubai is still struggling to sort out its debt.

Investors were shocked when government-owned Dubai World declared a payment standstill on its debts in Nov 2009 — a brutal tarnishing of the  ”sovereign halo”, which investors thought shone even on those borrowers whose debt did not have a solid sovereign guarantee.

A number of debt restructurings have taken place since then, including most recently for $2.5 billion in debt from Dubai International Capital (DIC). But banks are looking vulnerable.

Gus Chehayeb, analyst at Exotix in Dubai, says two-thirds of Dubai’s bank debt restructuring has been completed following DIC, but there is still $12.2 billion in bank debt under negotiation.

Chehayeb says:

It has not paid to be a banker in Dubai. To date, bankers have shouldered ALL of Dubai Inc’s debt restructuring costs, while bondholders have remained.  completely untouched.

But the approach has helped Dubai to recover some of its glow:

This “4Bs” strategy (bailout bondholders, burn the banks) has worked magic for Dubai. It has allowed Dubai Inc to extend a significant portion of its bank debt maturities, which has provided the emirate significantly more breathing room, while its assets have more time to potentially recovery in value. ..this strategy of honouring its public obligations has been one of the main drivers of increased market confidence in Dubai’s creditworthiness, which has allowed Dubai and its GREs (government-related entities) to be welcomed back to the debt capital markets with strong appetite.

It’s not just Dubai, market observers say — other banks in the Middle East and also central Europe have a high level of risky debt on their books. And — no surprises here — it’s affecting the developed world too, even outside the euro zone.

Take Denmark, where bank debt insurance costs have risen recently. The country’s biggest bank, Danske, has warned loan writedowns will be high this year — could Danish banks be another case for government support?

 

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