Dubai debt delay rattles confidence in Persian Gulf

The cost of protecting government notes from Qatar to Saudi Arabia rose the most since June Wednesday as Dubai World, with US$59 billion of liabilities, sought a “standstill” agreement from creditors. Bonds of its property unit, Nakheel PJSC, mature Dec. 14. Dubai contracts climbed 120 basis points to 438 basis points, the most since they started trading in January, CMA Datavision prices showed.

“There is nothing investors dislike more than this kind of event,” said Norval Loftus, the head of convertible bonds and Islamic debt at Matrix Group Ltd. in London, which manages US$2.5 billion of assets including Dubai credits. “The worst-case scenario will of course be involuntary restructuring on the Nakheel security that brings into question the entire nature of the sovereign support for various borrowers in the region.”

Moody's Investors Service and Standard & Poor's cut the ratings on state companies Wednesday, saying they may consider state-controlled Dubai World's plan to delay debt payments a default. The sheikhdom, ruled by Sheikh Mohammed Bin Rashid Al Maktoum, borrowed US$80 billion in a four-year construction boom that reduced its reliance on falling oil supplies and created the region's tourism and financial hub.

“Dubai is the most indicative of the huge global liquidity boom and now in the aftermath there will be further defaults to come in emerging markets and globally,” said Nick Chamie, head of emerging-market research at Toronto-based RBC Capital Markets.

Credit-default swaps across the region rose Wednesday, with Saudi Arabia climbing 11.5 basis points to 86.5 and Qatar rising 5.5 basis points to 99, according to London-based CMA. Contracts linked to Abu Dhabi rose 34.5 basis points to 134.5.

The swap contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to US$1,000 a year on a contract protecting US$10 million of debt.

Dubai's contracts, which increase as perceptions of credit quality deteriorate, are higher than Iceland's. Credit-default swaps on DP World jumped by a record 163 basis points to 522, according to CMA data. The price of Nakheel's bonds fell to 86 cents on the dollar from 110.5 the day before, according to Citigroup Inc. prices on Bloomberg.

UBS AG, Switzerland's largest bank, said it expects the UAE will prevent a default by Nakheel. Dubai is one of seven sheikhdoms in the UAE that includes Abu Dhabi, which holds 8 percent of the world's oil reserves and bought US$5 billion of bonds sold by Dubai Wednesday through state-controlled banks.

Unlike Argentina, which stopped payments on US$95 billion of debt eight years ago after yields on benchmark bonds more than doubled in four months to more than 40 percent, Dubai's announcement Wednesday “was a surprise,” said Alia Moubayed, a London-based economist at Barclays Plc.

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