Dubai World in 'Constructive' Talks

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(Bloomberg) Dubai World said it began "constructive" talks with banks to restructure $26 billion of debt, including liabilities owed by units Nakheel World and Limitless World.

Debt from subsidiaries such as Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations because those companies "are on a stable financial footing," Dubai World, one of the emirate's three main state-related holding companies, said in a statement.

The company is seeking to delay payments on less than half its $59 billion of obligations, damping concern that a potential default may set back the global financial system's recovery from the credit crisis. Stocks erased losses in the U.S. after the Dubai World statement, sending the Standard & Poor's 500 Index up 0.4 percent.

"Now that they're saying $26 billion, it reduces some of the panic that built up in the last few days," said Nick Chamie, an analyst at RBC Capital Markets in Toronto. "This is positive. The market was feeding on its own concern and there were talks of $60 billion debt that would need to be restructured."

Credit-Default Swaps

The cost of protecting against a default by Dubai fell yesterday for the first time in a week. The country's credit-default swaps declined 75 basis points to 571 basis points, according to prices from CMA Datavision. Default swaps, which fall as the perception of credit quality improves, for Abu Dhabi narrowed 34 basis points to 144 and contracts linked to DP World Ltd. dropped 109 basis points to 631. A basis point equals 0.01 percentage point.

Dubai shares tumbled and Abu Dhabi's stock index dropped the most in at least eight years yesterday on the first trading day since the government announced state-run Dubai World may delay debt payments. The Dubai Financial Market General Index dropped 7.3 percent to 1,940.36, the biggest decline since October 2008. Abu Dhabi's ADX Index fell 8.3 percent, the most since Bloomberg began compiling the data in 2001.

The Nov. 25 announcement triggered the biggest stock market slump in three months in Asia and Europe's worst rout since April as the debt request risked adding to the $1.7 trillion of losses and writedowns suffered by banks in the global crisis.

'Minor Problem'

The $26 billion figure "confirms that it's a relatively minor problem," said Michael Atkin, who helps oversee $10 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston. The country's struggles serve as a "reminder that we're not yet out of the woods in the global financial system. It raises the issue of what else is out there," he said.