Insuring Dubai Holding debt rises

Credit default swaps have climbed 14% since December 15 to more than 2,000 basis points.

DUBAI // The cost of insuring Dubai Holding debt against default has risen over the past two weeks despite what analysts say is evidence that it can meet its immediate obligations. Concerns have risen about Dubai Holding since its sister company Dubai World announced in November a debt restructuring.

Credit default swaps (CDS) for Dubai Holding Commercial Operations Group (DHCOG) have climbed 14 per cent since December 15 to more than 2,000 basis points or 20 percentage points, according to data from CMA DataVision in New York. That means it costs more than US$2,000 (Dh7,346) to insure $10,000 worth of Dubai Holding bonds. Dubai Holding has an estimated $15 billion of debt. Less than a fifth of that is owed by DHCOG, while three quarters is owed by Dubai Holding's private equity arm, the Dubai Holding Investment Group. Analysts say DHCOG has already received government emergency funds, leaving it with about Dh2bn in cash to help repay about Dh3.2bn they estimate it owes over the next six months.

A spokesman for the company said Dubai Holding executives were unavailable for comment. Analysts say the sudden surge in concern about DHCOG may reflect a more general retreat in appetite for risk among global investors. With the end of the year approaching, many market participants are already on holiday and others are unwinding positions to close out their books for the year. But the moves also come amid a growing realisation that Dubai is preparing to force its creditors to share some of the losses it has suffered in the wake of the financial crisis.

Investors began scrutinising Dubai Holding after November 26, when Dubai announced that it was stepping in to restructure Dubai World, appointed its own restructuring executive and said it would ask Dubai World's creditors for a six-month standstill on debt repayments. The announcement shattered hopes that Dubai, and by extension the UAE and the emirate of Abu Dhabi, were standing by to ensure that any debts of a state-owned entity would be paid in full.

The global financial crisis and the drop it triggered in the Dubai property market - where average prices fell by as much as 30 per cent - have made it more difficult if not impossible for some companies to come up with enough cash to service debts incurred during the boom. In the wake of Dubai World's announcement, credit ratings agencies downgraded their assessment for debt of many state-owned companies, arguing that they could no longer any government support. Moody's lowered its rating for DHCOG to below investment grade the day of Dubai World's announcement and its two competitors, Fitch Ratings and Standard & Poor's, followed suit earlier this month.

While Dubai Holding is not government-owned, it is owned by Sheikh Mohammed bin Rashid, the Vice President of the UAE and Ruler of Dubai, and controls his personal assets. Dubai Holding CDSs soared after the Dubai World announcement, nearly doubling. They climbed by another two thirds when Dubai Holding's credit ratings were lowered. Even so, Moody's and S&P have said they believe Dubai Holding has enough cash to meet its immediate debt repayments. S&P said the company had already received assistance from the Dubai Financial Support Fund, which is in charge of doling out the $21bn in funds Dubai has raised so far selling bonds to the Central Bank, Abu Dhabi and Abu Dhabi banks.

S&P said DHCOG was sitting on Dh2bn in cash at the end of October and faced debt repayments equivalent to about Dh3.2bn between now and the end of June, including a $555m credit facility due that month. Dubai Holding's other large, imminent obligation is a loan of about $600 million loan due to be repaid in June by Dubai International Capital. In a report earlier this month, however, analysts at Barclays Capital warned clients that Dubai Holding could be "next in line" to restructure its debts. And Morgan Stanley issued a report earlier this month saying that Dubai World could be followed by other member of Dubai Inc. As much as $12.3bn of Dubai Holding's debt could be subject to restructuring, it said, under a worst-case scenario.

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