Dubai's Jolt Back To Reality

[LahoreEstate]

Dubai's Jolt Back To Reality
Lionel Laurent, 02.25.09, 11:20 AM EST
Optimism surrounding the $10.0B bond issuance fades.

It was billed as the greatest boost to business confidence in the United Arab Emirates yet. After months of capital outflows, canceled real-estate projects and evaporating liquidity, Dubai revealed on Sunday it had raised $10.0 billion from the UAE federal government in Abu Dhabi.

The announcement sent stocks soaring nearly 8.0% on Monday, eased spreads on credit-default swaps and was cheered by business leaders and beaming politicians splashed across the pages of the UAE's newspapers.


Yahoo! BuzzBut by Wednesday, the mood in Dubai dimmed. Most of Monday's gains had been clawed back, with the Dubai Financial Market Index back down to 1,568.06 points, or around 7.6% below Monday's close of 1,652.98 points. Dubai's iconic government-owned developer Emaar Properties sank 2.4% on the stock market Wednesday, to 2.05 UAE dirhams ($2.61), while interior contractor DEPA fell 2.3%, to 0.43 UAE dirhams (55 cents). Both companies are part of a review of Dubai's major government-owned enterprises by Moody's, which could see their credit ratings cut. (See "Opaque Dubai Faces Ratings Action.")

The backlash after the initial surge may represent the many unanswered questions surrounding the so-called "bailout" of Dubai. The emirate said on Wednesday it would use the $10.0 billion on a case-by-case basis to help wholly or partly state-owned companies repay short-term debts. But to truly restore investor confidence, a more comprehensive stimulus package with direct intervention in the real-estate and mortgage-lending markets would be needed. The emirate's construction boom is unraveling, with property prices down an estimated 20.0% to 25.0% from their peak last year; even if the fresh influx of precious billions helps a developer like Nakheel repay corporate bonds, it won't grease the wheels of additional real-estate financing or prop up prices.

"I can't see how this bond issue would be immediately or directly beneficial to the real estate market unless the government introduced some sort of package which might shore up the mortgage default risk or ring-fence properties in default," said Chet Riley, an analyst with Nomura International. "But this would then assume the exit risk, which would be considerable."

As for the second $10.0 billion chunk Dubai said it planned to raise on Sunday -- presumably by issuing five-year bonds on the open market, rather than sealing another Abu-Dhabi deal -- speculation was mounting Wednesday that this would not take place until 2012 or even 2013. Nomura's Riley told Forbes that with a planned coupon rate of 4.0%, such a bond issue would not be warmly greeted in the current environment. Although this yield is still higher than for sovereign debt issued by Britain, Germany or the U.S., 4.0% does not price in the full extent of comparable risk.

http://www.forbes.com/2009/02/25/dubai-u...bt_16.html