Insuring Dubai debt costs more

Uncertainty about Dubai World’s $22 billion debt restructuring is starting to weigh on the credit, pushing up bond yields and Dubai’s debt insurance costs, according to Reuters.

Five-year credit default swaps (CDS) for Dubai have risen sharply in the past week and are now quoted at 510 basis points (bps), up about 45 bps on the week, meaning it costs over half a million dollars a year to insure $10 million of the emirate’s debt for a five-year period.

“Since the Dubai World statement which came out of the blue, we have not had any sort of clarity as to how the talks are progressing, we have not had any statements or any proposals,” said Nish Popat, head of fixed income at ING Investment Management Middle East in Dubai.

“We are hearing they are still talking to the banks, but it’s been two months and there is still this uncertainty and lack of clarity.”

The CDS surge back to levels seen just before the mid-December bail-out by Abu Dhabi is fuelling a rise in debt insurance costs, albeit on a smaller scale, for other regional corporates and names such as Abu Dhabi and Bahrain, according to prices from CDS monitor CMA DataVision.

Analysts say the rise comes against the backdrop of wobbly global equity markets and the debt crisis in Greece and other euro zone peripherals.

But they said a recent move by Standard and Poor’s to withdraw its rating for Dubai Holding Commercial Group (DHCOG), owned by the emirate’s ruler, had hit sentiment for the region.

“We don’t think headlines will go back to the emergency mode in the coming quarters but clearly people are cautious because there is some danger of debt rescheduling,” said Luis Costa, emerging debt strategist at Commerzbank.

“The $10 billion package from Abu Dhabi means Dubai World can plug refinancing for 2010, but huge chunks of refinancing remain still for 2011.”

Dubai World subsidiary Nakheel has a domestic bond which matures on May 13, a focus of attention for investors. Dubai World subsidiary Nakheel’s $750 million sukuk due Jan 2011 is trading at 55, giving a yield of 79 per cent.

The yield has risen sharply in the past few weeks, but analysts say it may have further to go.

“The market is assigning too high recovery valuations to Nakheel,” said Milena Ianeva, strategist at Barclays Capital.

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