Bloomberg News

Dubai Default Risk Falls to Pre-Dubai World Debt Delay Level

June 02, 2011

(Updates prices in second and fifth paragraphs.)

June 2 (Bloomberg) -- Dubai’s default risk fell to the lowest level since Dubai World roiled global markets with a debt restructuring in 2009, as Emirates airline sold bonds and local entities reach debt accords.

The cost of protecting Dubai’s debt against default dropped to 324 basis points today, according to data provider CMA at 2:28 p.m. in London. The five-year credit default swaps surged from 325 basis points on Nov. 24, 2009 to 655 three days later after Dubai World announced plans to restructure about $25 billion of debt.

Emirates, the world’s biggest airline by international traffic, sold $1 billion of five-year bonds yesterday, yielding 330 basis points over the benchmark mid-swap rate. State-owned Dubai World reached a final agreement with its lenders in March, while Dubai Holding LLC and property developer Nakheel PJSC are in talks with creditors to restructure a total of about $20 billion.

“The Emirates bond was a factor in the tightening of the CDS, because of the demand and its pricing,” Usman Ahmed, the head of fixed income at Emirates NBD Asset Management, a unit of the United Arab Emirates’ biggest bank, said. “It helped re- price the Dubai curve. The demand for Emirates’ bond showed confidence returning to Dubai’s debt market.”

‘Piece of Dubai’

The yield on Dubai government’s 6.7 percent bond maturing October 2015 declined 2 basis points, or 0.02 percentage point, to 5.16 percent at 6:04 p.m. in Dubai, according to Bloomberg composite prices.

Dubai, which doesn’t have a rating, and its companies ran up at least $129.3 billion of debt, according to estimates by Credit Suisse Group AG, to develop its property, tourism, trade and financial-services industries. Dubai’s government on May 16 rescued Dubai Bank PJSC, an Islamic lender owned by Dubai Holding LLC and Emaar Properties PJSC, after loan losses rose.

The default risk dropped because of the Dubai World restructuring, Emirates’ bond sales and “Dubai’s perception as a safe haven amid the turmoil in the Middle East and North Africa,” said Rawad Hakme, co-manager of fixed income allocation at Dubai-based EFG-Hermes U.A.E. Ltd., a unit of investment bank EFG-Hermes Holding SAE. “Simply put, everyone seems to want a piece of Dubai.”

More Expensive

Dubai credit default swaps are still more expensive than those of Egypt and Tunisia, two countries that saw their presidents toppled in popular uprisings that swept the Middle East this year. Egypt’s contracts fell 5 basis points to 299 today, the lowest level since Jan. 14, while Tunisia’s credit default swaps were at 165, according to CMA. The data provider is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The United Arab Emirates, a federation of sheikhdoms of which Dubai is the second-largest, has avoided the unrest that spread to Libya, Yemen, Syria, Oman and Bahrain.

--With assistance from Abigail Moses in London and Zahra Hankir in Dubai. Editors: Shaji Mathew, Claudia Maedler

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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