November 26, 2009 / 2:31 PM / 10 years ago

Gulf bonds plunge, CDS soar on Dubai; shadow on planned bonds

LONDON, Nov 26 (Reuters) - Dubai’s shock move to restructure billions of dollars in debt fuelled a heavy selloff in Gulf bonds on Thursday while debt insurance costs soared, endangering planned issues from the region in the near future.

At least one issuer was forced to pull a bond sale after Dubai said on Wednesday it was seeking a standstill on debt held by flagship firms Dubai World and property developer Nakheel, until at least May 2010.

With local markets closed, ambiguity still surrounds the terms of the restructuring, the amount of debt being restructured and which investors are most exposed. The reaction in offshore markets has nevertheless been fast and furious.

The bond at the centre of Dubai’s restructuring efforts, the Dec 2009 Islamic bond from Nakheel, XS0277553052=R has lost a third of its value since the announcement, the price having collapsed to 72 points from 111 beforehand.

Investors in Europe were dumping other regional bonds too.

“We are having an extremely nervous session on Middle eastern credit — we are seeing implications for Qatari and Abu Dhabi bonds too which are trading down in sympathy,” said Luis Costa, head of emerging debt strategy at Commerzbank in London.

A 2014 issue from state-owned Dubai Holding for instance fell over 16 points KY028530382= while Dubai Ports World’s 2017 Islamic bond AE030740815= fell 10 points to the lowest since February, the time when Dubai was seeking to refinance other debt. Neither of these deals is subject to restructuring.

“Anything from Dubai or Abu Dhabi is getting absolutely hosed,” a bond trader in London said. “There is massive pressure across the board, exacerbated by the thin liquidity.”

Gulf markets are closed for Eid holidays.

The bond trader said names from oil and gas-rich Qatar were less affected but were still being quoted lower, with a recently issued three-tranche $7 billion bond down a couple of points.

The shock restructuring was having a knock-on effect on the cost of insuring the region’s debt, with Dubai’s five-year credit default swaps at three-month highs around 500 basis points, versus around 300 bps before the restructuring news.

Traders said the CDS had peaked early in the session around 580 bps — levels commensurate with a sovereign credit rating around ‘B’ — rather than the Aa2 that Dubai is rated at by Moody’s as part of the United Arab Emirates.

This means it would cost half a million dollars to insure $10 million in Dubai sovereign debt for five years.

Other credits in the region were also suffering — Bahrain five-year CDS jumped almost 40 bps to 231.5 bps while Qatar saw five-year spreads rising 10 bps to 114.8 bps.

Corporate CDS also widened — UAE firms Mubadala and Mashreqbank saw spreads blowing out 100-240 bps, CMA said.

“There are other sub-sovereigns in the region that will need funding in the next year. They will now have to pay wider spreads,” a fund manager in London said.

The Dubai fallout rippled across emerging markets as stocks fell 1.5 percent, bond yields rose and currencies eased in countries like Turkey, Hungary and South Africa.

MORE CASUALTIES?

Bahrain-based Gulf International Bank became the first bond issuer hit by the Dubai move as syndicate managers pulled an issue that was expected to price on Thursday for $500 million.

“Dubai is a massive event and we decided it would be prudent to postpone the GIB deal,” the bond’s arranger told Reuters.

GIB is unlikely to be the last casualty. State-run Dubai firm DEWA (Dubai Water and Electricity Authority) reportedly plans to borrow up to $2 billion in coming weeks, analysts said.

Saudi Hollandi Bank, Emirates Airlines and UAE bank Emirates NBD also have bond plans for coming months.

Analysts say one consequence will be investor mistrust of sovereign backing. Many Gulf firms benefit from substantial rating premiums that are based on assumptions of sovereign support, making it cheaper for them to borrow.

“Investors will now have to re-appraise the quality of sovereign support for state-owned entities in the region,” Royal Bank of Scotland said in a client note, adding Dubai’s move could prompt rating agencies to re-assess their view on issuers.

At best, some of the exuberance on the region’s assets may be tempered by the restructuring, which comes just months after Saudi banks Saab and al-Gosaibi shook investors with fraud allegations and plans to restructure $22 billion in debt.

But many saw buying opportunities amid the carnage.

“For the region’s strongest credits — Qatar, Abu Dhabi, Saudi Arabia, and probably preferring industrial names over financials — this is a buying opportunity,” RBS said. (Additional reporting by Sebastian Tong, editing by Mike Peacock) ((sujata.rao@thomsonreuters.com; +44 207 542 6176; Reuters Messaging: sujata.rao.reuters.com@reuters.net))

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