Abu Dhabi Commercial Said Owed $1.9 Billion by Dubai

Abu Dhabi Commercial Bank PJSC may be owed $1.9 billion by Dubai World, making it the largest creditor outside the emirate to the state company seeking to reschedule debt, said two people familiar with the companies.

“We are in touch with Dubai World, and we have been in discussions more than once today and yesterday,” Ala’a Eraiqat, the chief executive officer of the third-largest lender in the United Arab Emirates, said in a telephone interview yesterday. He declined to comment on specifics. “We have a lot of assurances which is a good thing.”

HSBC Holdings Plc and Standard Chartered Plc led declines in bank shares in Asia today, and European stocks fell the most in seven months yesterday after Dubai World, with $59 billion of liabilities, said it will seek a “standstill” agreement to delay repayment of its debt. Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Credit Suisse Group AG slumped on concern Dubai will rattle lenders recovering from the global credit freeze that has triggered $1.72 trillion in losses and writedowns.

Dubai World, controlled by the emirate’s ruler, Sheikh Mohammed Bin Rashid Al-Maktoum, borrowed from more than 70 lenders to buy assets ranging from stakes in Las Vegas casino company MGM Mirage to London-traded bank Standard Chartered through Istithmar PJSC. The request for a postponement includes $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC.

“Our exposure is immaterial,” Credit Suisse spokesman Marc Dosch said. Spokespeople for Barclays, HSBC, Lloyds and RBS declined to comment.

Impact ‘Manageable’

HSBC, Europe’s largest bank, fell as much as 7.1 percent in Hong Kong trading today and Standard Chartered dropped as much as 6.4 percent, following declines in London yesterday.

Goldman Sachs Group Inc. analysts led by Roy Ramos estimated potential credit losses at HSBC related to Dubai World may be $611 million, and $177 million for Standard Chartered, according to a research report released today. The impact on both banks will be “manageable,” the analysts wrote.

Sumitomo Mitsui Financial Group Inc., Japan’s second-largest bank by market value, may be owed at least $225 million by Dubai World, according to people familiar with the matter. Mizuho, the No. 3, may be owed about $100 million, the people said. Spokespeople for both banks declined to comment.

Property Collapse

Dubai borrowed $80 billion in a four-year construction boom that transformed the sheikhdom into a regional tourism and financial hub. It suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.

“We understand the concerns of the market and the creditors in particular,” Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, said yesterday in the first statement from the government since it announced the debt rescheduling. “However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”

Dubai World had $59.3 billion in liabilities and $99.6 billion in assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai has a total $4.3 billion of government and corporate debt due next month and $4.9 billion in 2010’s first quarter, Deutsche Bank data show.

“The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear,” said Arnab Das, London-based head of market research and strategy at Roubini Global Economics. “Of course, Dubai had a lot of the excesses during the bull market.”

Fundraising

Dubai is one of seven sheikhdoms in the U.A.E. Abu Dhabi, another of the emirates, holds 8 percent of the world’s oil reserves and bought $5 billion of bonds sold by Dubai this week through state-controlled banks. Sheikh Mohammed turned to Abu Dhabi’s central bank on Feb. 23 to raise $10 billion by selling debt.

Dubai World’s biggest creditors are Abu Dhabi Commercial and Dubai-based Emirate NBD PJSC, the United Arab Emirates’ biggest lender by assets, according to two people familiar with the situation who declined to be identified because the information isn’t publicly available.

The debt owed to Abu Dhabi Commercial adds to problem loans from Saad Group and Ahmad Hamad Algosaibi & Bros Co., the Saudi Arabian family companies that defaulted earlier this year. Abu Dhabi Commercial fell 31 percent from Sept. 17 to Nov. 1 after the bank said it was owed a total $610 million by the two companies. The stock has risen 22 percent this month. It didn’t trade yesterday during the Eid Al-Adha religious holiday.

Bank Shares Slump

“Nobody can know how much exposure these banks have got to Dubai unless they choose to tell you themselves,” said Simon Maughan, an analyst at MF Global Securities Ltd. in London. “I don’t think Dubai will default, however. Once there’s been a bit of horse trading over the weekend, Abu Dhabi will step in and bail out Dubai.”

Royal Bank of Scotland, Britain’s biggest government- controlled bank, slumped 7.8 percent to a seven-month low of 33 pence yesterday. Barclays, the U.K.’s second-biggest bank, fell 8 percent, the most since June. Lloyds, the U.K.’s biggest mortgage lender, retreated 5.8 percent. London-based HSBC, Europe’s biggest bank, fell 4.8 percent. Europe’s Dow Jones Stoxx 600 Index lost 3.3 percent in London, the biggest drop since April 20.

Barclays, Deutsche Bank AG and Citigroup Inc. “stressed privately” that their “exposure to Dubai World was limited or insignificant,” the Financial Times reported on its Web site.

Protection Costs Soar

The MSCI World Index of 23 developed markets has risen 25 percent this year after banks worldwide recorded more than $1.7 trillion in writedowns and losses and governments committed about $12 trillion to shore up economies.

Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies this week, saying they may consider Dubai World’s plan to delay debt payments a default.

The cost of protecting Dubai bonds against default has soared to the fifth highest worldwide, exceeding Iceland’s and Latvia’s, at 530 basis points after the biggest increases since the credit-default swaps began trading in January, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record to 612 basis points yesterday.

The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.

The price of Nakheel’s bonds fell to 70.5 cents on the dollar yesterday from 84 cents Nov. 25 and 110.5 cents a week ago, according to Citigroup Inc. prices on Bloomberg.

Via : Bloomberg