Dubai's debt decision a credit positive step

The absence of Dubai government guarantees in support of the Dubai Group restructuring is credit positive for Dubai's sovereign credit worthiness, Bank of America Merrill Lynch (BofA) said in a report yesterday. "While decreasing contingent liabilities is positive for sovereign creditworthiness and CDS [credit default swaps], the immediate impact may be trumped by broader Dubai Inc restructurings and sentiment," Jean-Michel Saliba, a BofA economist wrote in a note. However, he added that the decision was broadly shrugged off by the market. The Drydocks example This announcement leaves Dubai Group to fend for itself with its creditors, who have been calling for $2 billion (Dh7.34 billion) in government support and a backstop guarantee of $1.8 billion. Dubai Group is the second firm after Dubai Drydocks to have to negotiate a restructuring deal with no government support. Dubai Group is seeking to restructure $10 billion ($6 billion in bank loans and $4 billion in inter-company loans, likely in part owed to the Dubai Financial Support Fund), though only $1.8 billion of syndicated loans appear in publicly disclosed data. Dubai Group is now reported to be offering maturity extensions of five years to secured lenders (owed $3.2 billion) and 8-10 years to partially secured and unsecured lenders (owed $2.8 billion). Interest payments are expected to be resumed once an agreement is reached with banks. Dubai Group appointed eight banks to represent creditors in two committees in 2011 to help with the restructuring. Paris-based Natixis SA's Nexgen unit and Dubai-based Mashreq PSC make up the committee of secured lenders. Royal Bank of Scotland Group Plc and Emirates NBD lead the group of partially secured and unsecured lenders. "The absence of government support is not a cause of big worry, because the assets backing the secured loans are big enough to pay back the loans. Banks should be patient until the asset prices recover," a banker with knowledge of the ongoing negotiations said. According to BofA Merrill Lynch, the lack of guarantees from the government in support of Dubai Group highlights a renewed focus to prioritise involvement and support to strategic government related entities (GREs). "Despite the lack of a perceived blanket guarantee, the preference appears to be to continue to protect bondholders over loan holders and thus ensure market access to other GREs across the Dubai Inc structure," Saliba said. However, the absence of government support to debt restructuring is expected to cause tighter liquidity conditions in the UAE banking sector. Additionally, the geopolitical threat from the Iran crisis could further tighten liquidity.                                                                From gulfnews