Abu Dhabi support rallies global credit indexes

ASSISTANCE PLEDGE: Abu Dhabi's $10bn pledge to assist Dubai saw credit indexes rally worldwide. (Getty Images)

The cost of protecting investors against Dubai defaulting on its debt tumbled the most since February after Abu Dhabi pledged $10 billion to help the emirate meet its obligations.

Five year credit default swaps on Dubai’s debt fell 111.5 basis points to 429, according to CMA DataVision prices at 5:15 p.m. in London. The Markit iTraxx SovX Western Europe index of swaps on 15 governments dropped 4.75 basis points to 62, according to JPMorgan Chase & Co.

Funds from Abu Dhabi, the capital of the United Arab Emirates and owner of the world’s biggest sovereign wealth fund, will help Dubai World unit Nakheel PJSC pay investors the $4.1 billion it owes on Islamic bonds maturing on Monday. State owned Dubai World roiled markets worldwide when it said on Dec 1 that it was in talks with creditors to restructure $26 billion of debt.

“A rally on Abu Dhabi’s support is clearly helping Asian and European credit,” Puneet Sharma, head of credit strategy at Barclays Capital in London, wrote in a note to investors.

Credit default swaps on DP World Ltd, the Middle East’s biggest port operator and a unit of Dubai World, fell 127 basis points to 444, according to CMA. Abu Dhabi slipped 9.5 basis points to 151 and Abu Dhabi National Energy Co fell 12.5 to 236.5. Qatar dropped 8.5 to 100.

The decline in default swaps tied to Dubai government debt was the biggest since Feb. 23, when the UAE’s central bank bought $10 billion of the Gulf state’s bonds.

Gary Jenkins, head of credit research at Evolution Securities Ltd in London said that Abu Dhabi’s support for its neighbour “will no doubt be taken as very good news by the market.”

Dubai’s equity index jumped 10 percent, the most in 14 months. Nakheel PJSC’s $750 million of Islamic bonds due 2011 surged to 67.5 cents on the dollar from 36 on Dec. 11, according to Citigroup prices.

Credit default swaps on European companies also fell on news of the Dubai bailout, with contracts on the Markit iTraxx Crossover Index of 50 mostly high yield European companies slipping 7 basis points to an 18-month low of 476.5, according to JPMorgan.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 1.25 basis points to 79.75. The Markit iTraxx Financial Index of 25 banks and insurers decreased 2 to 77.5 and the subordinated debt index dropped 5 to 141, JPMorgan prices show.

Default swaps on Greek government debt rose 23.5 basis points to 223.5, CMA prices show. The contracts fell at the end of last week after soaring to a nine-month high on concern the nation would have its credit rating cut because of rising debt. Fitch Ratings downgraded Greece last week and two other ratings firms threatened to follow suit.

Credit default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A basis point on a contract protecting $14.7 million of debt from default for five years is equivalent to $1,463 a year.

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