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Sat 20 Mar 2010 08:21 AM

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Dubai deal seen raising funding costs for UAE firms

Dubai World plan may have less attractive terms for the creditors - analysts.

Dubai deal seen raising funding costs for UAE firms
GLOBAL CONCERN: Before the financial crisis hit global markets, foreign banks were lending extensively to the region. (Getty Images)

A Dubai World debt deal will help lift investor concerns about the regions' financial stability but local firms trying to raise money will still pay a higher price and face more scrutiny, analysts said

Dubai World, which said in November it would delay repayment on $26 billion in debt as it restructured, is in the final stages of preparing a debt restructuring proposal to present to its creditors.

Analysts expect any proposal that sets less attractive terms for creditors will set a precedent that will make it harder for companies in Dubai World's wake to borrow money or raise funds.

Analysts are expecting the plan to have less attractive terms for the creditors, setting a precedent that will make it harder for companies coming in Dubai World's wake to borrow money or raise funds.

"It (the debt proposal) will likely make capital raising more challenging. Risk premiums should be higher going forward," UBS analyst Saud Masud said.

Masud said though the exact impact for Dubai-based companies will depend on the deal, the extent to which creditors will see a reduction in the principal and by how much the maturities will be extended.

"You will see, in the medium- to long-term, increased demand from investors for more transparency, disclosures and unfortunately, on pricing as well," Mohieddine Kronfol, managing director at Algebra Capital in Dubai, said on Friday.

Dubai-based companies have already been hard hit, with a near-50 percent fall in property prices and most construction projects in the area have come to a halt as well as a curb in lending by provisions-hit regional banks.

Before the financial crisis hit global markets, foreign banks were lending extensively to the region, aiming to cash in on the oil-rich emirate's growth prospects.

However, foreign investor confidence was deeply shaken by Dubai World's announcement on its debt and, subsequently, international capital markets have become less accessible to most Gulf companies.

At the same time, companies that need to raise fresh capital to rebuild balance sheets or to fund expansion have found debt markets in the region are clogged and the appetite for initial public offerings is remarkably low.

The bond issue by National Bank of Abu Dhabi's (NBAD)on Thursday has offered a ray of hope. The $750 million, five-year bond was several times oversubscribed.

"The key part of the NBAD issue was that it was the first issue since the crisis. The order book was rumoured to be $3.5 billion which is positive. There will still be demand for quality issues in the market," said Nish Popat, head of investments at ING Investment Management.

Analysts also said they expected foreign investors to demand more explicit government support for debt issuance from the region and if they do not get it, the cost of debt may go higher.

"The big question mark is, where is the balance sheet support coming from? If it is not Dubai, then it has to be Abu Dhabi. To just maintain cost of debt, it is reasonable to assume explicit government support may be needed" Masud said.

Earlier in the month, state-owned utilities firm Dubai Electricity and Water Authority (DEWA) said its $1.5 billion bond issue would carry no government guarantee, casting doubts on investor interest in the issue.

Analysts said there may be a slight pick up in the number of issues after Dubai World's debt proposal, which may come as early as next week, as capital needs are rising and funding from banks wanes.

"I think that companies that think strategically for funding their balance sheets would want to access markets, even at a higher price as funding from banks have come down," said Algebra Capital's Kronfol. (Reuters)

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Mark Brown 10 years ago

saud masud, he seems to have an opinion about everything and arabian business will happily given him the opportunity to express his nonsense every day. Last time I checked he was a real estate analyst, now he's a capital market specialist as well? Playtime is over guys, please go find some real experts to comment on these issues and let mr. masud fade into the background

tim 10 years ago

Great comment MB!!! unfortunately the UAE is full of these 'experts'. sloppy journalism.

Kosta 10 years ago

To Mark Brown.... Mark, clearly you dont know much about Saud Masud. He is the head of research at UBS-Middle East...one of the world's largest investment banks. Secondly, yes, he currently tracks real estate...but he has to track banks and related issues to properly and prudently comment on real estate..if you dont understand that.....well then...go get an education.

Rashid 10 years ago

Boohoo-- sorry, you're the weakest link. I'm gonna side with MB & Tim on this one. Saud Masud is a an expert in sensationalism and hotairism. Next!

Mark Brown 10 years ago

Wasn't UBS the bank that lost nearly USD 50 billion in sub-prime mortgage CDO, working for a bank like that indeed gives you immediate authority on all things! Secondly, it's about time a distinction is made between 'troubled Dubai' (Dubai World, Dubai Holding) and 'untroubled Dubai' (DP World, ICD, Emirates Airlines, Dewa, etc). If you look at CDS prices the market is already making a distinction between the two, so why can't he? Trust I didn't lose you there, tracking market risk through CDS and fixed income markets does require some education.

Kosta 10 years ago

To Rashid; very inteligient response... To Mark Brown: Fair enough...you are very correct to state that monitoring risk of default and assesing the cost of insuring debt and its impact on funding costs one has to follow the Credit Default Swap trends as well as fixed income yields and related activity. Clearly you are well versed in this field, therefore, i expect that you will appreciate the following: 1. your slur at Saud Masud, who is not a trader, or was not involved in any securitisations in his career @ UBS is a little offsides. 2. he is quoted in only one paragraph - and what he states is simply correct..that the outcome of Dubai World negiotiations will ultimately affect credit availability, borrowing costs and covenants to other Dubai and UAE based entities...(is that not correct?)Government related or not...cause precedents for Sovereign Risk measurment and mitigation will be set for Global Capital Markets regarding the UAE. (NB! due to this, NBAD sold this week just under AED 2,8 Bn worth of bonds on a medium term note program - timing was good as fundign costs due to DW issues are expected to rise in early April due to the DW 10th April deadline). 3. His (Saud) general commentary on UAE and dubai real estate markets is realistic and prudent. Stating that prices of assets are still considerably overpriced, in my opinion and analysis, he is correct. And I, as he, see a further 30-40% reduction in rental and sales prices across the board. Anyone who argues that against Saud, well wait and recap with him at the end of 2010. Saud was calling the local real estate crash correctly in early 2008, as I did, people ignored us then, and they ignore us know as we feel that Dubai real estate invetsment offers good opportunities at present if prices and yield targets are negotiated correctly.

SCC 10 years ago

You people have such selective memories. For the record, if SM was indeed calling the crash in early 2008, it wasn't from a UBS base as he only joined them in October of that year, at which point everyone was an expert, given that prices were already fallling. Equally, please point me to the place where you can be identified as having correctly forecast a housing turnaround. I know I can, clearly in print in numerous articles published in Arabian Business and on AB.com amongst others. Yet now, 18 months into the depression, hordes of individuals are jumping out maintaining they saw it all. Please enlighten me as I'm genuinely interested.