Bloomberg News

Dubai Debt Yields Fall Amid Bank System Clean Up: Arab Credit

October 12, 2011

Oct. 12 (Bloomberg) -- Dubai bonds rose to the highest in a week after the government ordered the United Arab Emirates’ biggest lender to take over an unprofitable rival as the emirate consolidates its banking system.

The increase pushed the yield on Dubai government’s 5.591 percent dollar bond down six basis points yesterday to 6.29 percent, the lowest since Oct. 3. Emirates NBD PJSC, the country’s biggest lender by assets, said it will take over government-controlled Islamic lender Dubai Bank PJSC. The cost to insure Dubai’s debt against default dropped to the lowest in almost three weeks.

“The news is a small positive as further consolidation in the banking sector is required,” said Emad Mostaque, a London- based Middle East and North Africa strategist at Religare Capital Markets Plc. “Comments by Emirates NBD indicate that the structure of the acquisition and government support will ensure minimal impact on Emirates NBD’s results.”

The U.A.E. is consolidating its banking industry after the global credit crisis slowed lending, hurt investment banking and led to an increase in loan defaults. Property prices in Dubai dropped about 60 percent from their peak in 2008. Many of the country’s lenders are creditors to government-owned Dubai World that restructured about $25 billion of debt this year.

Emirates NBD said its takeover of Dubai Bank, which was rescued by the government in May, won’t hurt profit “due to the transaction structure and support provided by the government of Dubai.” The bank is rated A3 at Moody’s Investors Service, the seventh-highest investment grade.

Ruler’s Orders

The takeover was ordered by the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, the government’s Media Office said in an e-mailed statement yesterday, without giving financial details. “This comes in line with Dubai government’s efforts to enhance the banking sector in the emirate,” it said.

The cost to insure Dubai’s debt against default fell 11 basis points to 484 yesterday, the lowest level since Sept. 22, according to five-year credit default swaps from data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a government or company fail to adhere to its debt agreements.

The yield on the Dubai government’s 6.396 percent Islamic bond maturing November 2014 tumbled the most since May 2010, declining 31 basis points, or 0.31 of a percentage point, to 5.99 percent yesterday. The rate on Dubai Holding Commercial Operations’ 4.75 percent bond due January 2014 dropped 37 basis points to 17.54 percent, the lowest in a week.

The average yield on Persian Gulf bonds fell 4 basis points to 5.12 percent, the lowest level since Oct. 3, according to the HSBC/NASDAQ Dubai GCC Conventional US Dollar Bond Index.

Dubai Holding, Emaar

Dubai Holding LLC, a company owned by the ruler, held a 70 percent stake in Dubai Bank, while Emaar Properties PJSC owned the rest. The bank reported a loss of 291 million dirhams ($79 million) in 2009, according to the latest financial statements posted on its website. It had total assets of 17.4 billion dirhams at the end of 2009.

“If one takes a longer-term view then consolidation of the banking sector in U.A.E. is a positive step,” said Julian Bruce, equity sales head at EFG-Hermes Holding SAE in Dubai. “With this specific transaction in mind, however, in the short term it is seen as burdensome for Emirates NBD.”

The bank’s shares dropped to the lowest level since April 20, falling 1.6 percent to 3.74 dirhams at the 2 p.m. close in Dubai. They have gained 36 percent this year compared with a 15 percent drop in Dubai’s benchmark index.

“Further consolidation in the sector will still be limited,” said Khalid Howladar, a senior credit analyst at Moody’s in Dubai. “While it makes good market sense in the U.A.E.’s relatively overbanked environment, here in the region it tends to be more state/policy driven given the large government shareholdings in the banks.”

--Editors: Riad Hamade, Claudia Maedler

To contact the reporter on this story: Stefania Bianchi in Dubai sbianchi10@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at Eevans3@bloomberg.ne


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