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Fri 27 Nov 2009 11:06 AM

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Asian, European markets plunge on Dubai debt doubts

Dubai exposure may have 'meaningful impact' on banks - CLSA.

Banks and builders bore the brunt of selling pressure across Asia on Friday as investors fretted that exposure to Dubai could further squeeze profits already hit by the global economic downturn.

Shares of leading banks including HSBC Holdings and Standard Chartered tumbled 7-8 percent, and property developers such as Australia's Leighton Holdings, and Japan's Obayashi Corp were dumped on fears of losses from some of Dubai's extravagant construction projects.

"Dubai is a real shock to the market," said Richard Morris, investment manager at Constellation Capital Management in Sydney. "Everybody's been playing the risk trade and this is a reminder of what went on during the global financial crisis.

"This will cause a shifting back to a more defensive stance."

Dubai has spooked financial markets since Wednesday when it said two flagship firms planned to delay repaying billions of dollars in debt. State-backed Dubai World has $59 billion of liabilities - a big chunk of the emirate's total debt of $80 billion.

Standard & Poor's and Moody's Investors Service have sharply cut their ratings on several government-related entities, with Moody's slashing some units to junk status and S&P saying the restructuring could be considered a default.

"Within banking specifically, the biggest exposure appears to be with Standard Chartered and, secondly, with HSBC, followed by DBS," said Daniel Tabbush, Asia banks analyst at CLSA in Bangkok.

Few of Asia's big banks would comment on their exposure, with most saying they did not talk publicly about loans to specific clients.

Standard Chartered said in a statement it was aware of its disclosure obligations and would make a statement in the event it had anything material to disclose.

Goldman Sachs said its initial worst-case loss estimates were $611 million for HSBC and $177 million for Standard Chartered.

An official for HSBC declined to comment. The London-based bank may have assets of around $9.7 billion in Dubai, Singapore's DBS has estimated.

No one at DBS was immediatedly available for comment on the bank's own exposure, and its shares were untraded due to a market holiday.

HSBC, and Japan's Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group, were among the bookrunners on an outstanding $5.5 billion syndicated loan to Dubai World in June 2008, according to Thomson Reuters LPC data.

Banks may have sold down their loan exposure in the secondary market, and one analyst estimated bookrunners typically retain only about 10-15 percent of a loan or bonds.

A unit of Dubai World, Dubai Drydocks, signed a $2.2 billion loan in October 2008, involving 15 lenders, according to Thomson Reuters LPC. Bookrunners on that loan included HSBC and Standard Chartered.

Sumitomo Mitsui, Japan's third-ranked bank by assets, and Australia's Westpac Banking Corp were among the banks that took part in the financing.

Officials for Japan's top three banks, Mitsubishi UFJ, Sumitomo Mitsui and Mizuho Financial Group, said they do not comment on individual deals.

Shares in Mitsubishi UFJ fell more than 2 percent in Tokyo, and Sumitomo Mitsui and Mizuho both lost nearly 4 percent.

Westpac said it had little financial exposure to Dubai World and expected no material loss. Other Australian banks, Macquarie Group, Australia and New Zealand Banking Corp and National Australia Bank Ltd, said they had no material exposure to Dubai.

Taiwan's fourth-ranked Mega Financial said it had exposure to Dubai World loans and was trying to find out how much.

"We are very concerned about the situation," Grace Lin, an executive vice president, told Reuters by phone. "We heard some other Taiwan banks also have exposure."

In South Korea, the Financial Supervisory Service has said the country's financial institutions' exposure to Dubai was just $88 million, but shares in KB Financial, Shinhan Financial Group and Woori Finance Holdings all fell by around 4 percent.

"Although local banks' exposure is negligible, falls in European bank stocks and broader concerns about global banks' exposure are pressuring the sector," said Lim Il-sung, an analyst at Meritz Securities. "A potential rise in risk premiums may render borrowing costs heavier for banks."

South Korea's construction subindex shed nearly 7 percent, led lower by Samsung C&T and Hyundai Engineering & Construction. Samsung C&T said it was working on a project from Dubai's Nakheel worth $350 million,

Australian builder Leighton, majority owned by Germany's Hochtief, said it was owed money on a few separate Dubai building projects, but the situation was not new.

"We are confident we will recover the moneys owing, but the timing is uncertain," a spokesman told Reuters. He did not name the projects or give details on how much was owed.

Leighton shares lost 4 percent.

In India, shares in DLF, the country's biggest listed real estate firm, fell as much as 8 percent. European banks take a big tumbleEuropean banks took their biggest tumble for six months on Thursday on concern about potential exposure to debt problems in Dubai, and firms where Middle Eastern investors own big stakes were also under pressure.

Dubai, whose building projects have been badly hit since the global financial crisis, has said it would ask creditors at its flagship firms Dubai World and property developer Nakheel to delay repayment on billions of dollars of debt.

By 8.50pm UAE time on Thursday the DJ Stoxx European bank index was down 5 percent at 218.1 points, its steepest one-day drop since mid-May.

Companies with significant Middle Eastern shareholders, such as the London Stock Exchange, were also hit by concern the holdings could be cut to meet obligations at home.

"The worry is about the exposure of the banks given the rapid pace of expansion in Dubai and around the area in the last few years," said one bank analyst, who asked not to be named.

Europe's biggest bank HSBC fell 4.8 percent, Royal Bank of Scotland and ING both tumbled over 7 percent and Lloyds Banking Group lost 6 percent.

They were among nine banks who were bookrunners on an outstanding $5.5 billion syndicate loan to Dubai World in June 2008, according to Thomson Reuters LPC data. Banks may have sold down their loan exposure in the secondary market, and one analyst estimated that bookrunners typically retain only about 10-15 percent of a loan or bonds.

HSBC and RBS declined to comment. ING said it had a negligible exposure to Dubai World bonds and saw no reason to divert from current guidance on risk costs.

Lloyds said it had a "modest" exposure to Dubai World, but said it did not represent a material threat.

Other bank shares under pressure included Barclays, which fell 8 percent, and Standard Chartered and Deutsche Bank, both down 6 percent. BNP Paribas, Credit Suisse and Societe Generale all shed over 5 percent.

UBS was among those playing down its exposure, saying it had a small but not material exposure to Dubai and Norway's DnB NOR said it had lent nothing to Dubai World and had just $300 million exposure to Dubai.

Worries about debt default spread across markets. "There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure," said Ian Stannard, currency strategist at BNP Paribas.

Jitters around Greek banks and their reliance on European Central Bank funding and the impact of a weak economy added to a fragile mood, dealers and analysts said.

The US market was closed for the Thanksgiving holiday.

Dubai said on Wednesday that the delayed repayment of debt was a first step toward restructuring Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.

The news has sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling. State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion.

"This was a surprise to all bankers, and probably to the management of DW as banks had been progressing well with refinancing discussions," a senior loans banker active in the Gulf said on Thursday.

"It sounds like a political decision taken right at the top which has caused Dubai immense PR damage. This is very serious and will have implications across the region," he said.

Shares in the LSE dropped 7 percent on worries that 22 percent shareholder Borsa Dubai might sell down its stake.

German carmaker Porsche, in which the Qatari Investment Authority holds a stake of about 10 percent, was another casualty, dropping 5 percent.

"Everything that is in Arabian hands is getting sold at the moment," said a Frankfurt-based trader.

Luxury auto peer Daimler, in which Abu Dhabi's Aabar Investments owns a 9.1 percent stake and Kuwait another 6.9 percent stake, also fell, as did British grocer J Sainsbury, in which the QIA owns about 26 percent. (Reuters)

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