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Tue 15 Jun 2010 05:33 PM

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Dubai World loans may have lost 56% in value - JPMorgan

DW's loans have a fair value of 44-46 cents to the dollar after revamp proposal - analyst.

Dubai World loans may have lost 56% in value - JPMorgan
DUBAI LOANS: In the proposal announced May 20, Dubai World offered banks various combinations of interest rates and principal repayment options depending on whether they lent in dollars or dirhams.(Getty Images)

Dubai World’s creditor banks may have lost as much as 56 percent of the value of the loans they made to the state-owned holding company after it altered the terms on $14.4 billion of debt, and lenders may have to aside 10 percent of these loans to cover losses, analysts said.

Dubai World’s loans have a fair value of 44 cents to 46 cents to the dollar after the restructuring proposal, JPMorgan Chase said in a research report e-mailed on Tuesday. The company’s $4.4 billion of Group A debt has a fair value of 58 cents to 61 cents, and $10 billion of Group B debt a fair value of 36 cents to 41 cents, it said.

“The steep discounts from face value mostly reflect the below-market cash interest of 1 to 2 percent being proposed by Dubai World on both tranches,” London-based analyst Zafar Nazim wrote in the report. He estimated the “appropriate yield” for Dubai World bank debt at 14 percent to 17 percent.

Dubai World, the holding company whose Nakheel real- estate unit is building palm-tree shaped islands off the emirate’s coast, said May 20 it reached an agreement with its main creditor group to restructure $14.4 billion of bank debt and $8.9 billion of government liabilities as it seeks to resolve a debt crisis that roiled global markets last year. It said banks would be paid $4.4 billion in five years and another $10 billion over eight years at below-market interest rates.

Dubai World’s creditor banks


may have to set aside 10 percent of the value of their loans

[
click to read

] to the company to cover losses after the company’s debt restructuring, Credit Suisse Group AG analyst Mohamad Hawa said on Tuesday.

“The effective haircut could be higher than that,” Hawa, head of Middle East and North Africa equity research at Credit Suisse, said at a presentation on Gulf equity markets in Dubai. “You can arguably say it’s between 30 to 40 percent,” although the provisions the banks would have to take would be lower because of accounting and central bank regulations, he said.

The global credit crunch has battered Dubai’s real-estate market and left the emirate’s companies unable to raise loans to repay debt. Property prices have fallen 50 percent in the city as banks reduced mortgage lending and speculators fled.

Dubai World’s seven biggest lenders - Emirates NBD and Abu Dhabi Commercial Bank from the United Arab Emirates and foreign lenders Royal Bank of Scotland Group, HSBC Holdings, Lloyds Banking Group, Standard Chartered and Bank of Tokyo-Mitsubishi UFJ Ltd. - negotiated the new debt terms with Dubai World on behalf of more than 90 banks.

In the proposal announced May 20, Dubai World offered banks various combinations of interest rates and principal repayment options depending on whether they lent in dollars or dirhams. Banks will be paid 1 percent interest on the loans maturing in five years. Lenders have three options under the eight-year maturities, with at least 1 percent interest and varying additional rates from 1.5 percent to 2.5 percent at maturity. Two of these options also have shortfall guarantees.

The combined non-performing loans of six of the seven largest banks in the U.A.E. that Credit Suisse covers may rise to 3.9 percent of gross loans in 2010 from 2.8 percent at the end of last year, Hawa said. Overall bank lending is likely to grow by 8 percent this year, although liquidity will remain tight over the next two years because of debt restructuring at some of Dubai’s state-owned companies, Hawa said.

National Bank of Abu Dhabi, the UAE’s second- biggest bank by assets, and Abu Dhabi-based First Gulf Bank are the best UAE bank stocks to buy, Hawa said.

Economies in the Middle East and Africa region are expected to record “sustained” economic growth over the medium to longer term, Kamran Butt, head of Middle East equity research for Credit Suisse’s private bank, said at the conference. Economic growth in the region will rebound this year, with Qatar’s economy growing the fastest, he said.

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