Barclays Capital advised its investment clients to buy Dubai debt three weeks before the Gulf state announced that it was seeking a standstill on debt repayments for Dubai World, the state-owned conglomerate.
In a research note published on November 4, Barcap said: “We recommend a long position in Dubai sovereign credit and see today’s negative price actions as an opportunity to buy.” The note was in response to a decision by Moodys, the ratings agency, to downgrade the creditworthiness of five state-owned companies in Dubai.
Barclays told its investors that the “implicit and explicit” support of Abu Dhabi, Dubai’s oil-rich neighbour, made Dubai’s debt a good bet.
However, Dubai’s shock decision to seek the standstill on debt repayments prompted a swift rethink by Barclays. In a note published last week, the bank said: “This announcement fundamentally changes our views ... On the back of today’s developments, we reassess our view towards Dubai as a whole.”
Dubai World contains many of the emirate’s leading assets including DP World, the ports operator that bought P&O three years ago, and Nakheel, the property developer behind the Palm Jumeirah islands. The company used debt to grow rapidly and has liabilities of $60 billion, including a $3.5 billion Islamic bond, or sukuk, that Nakheel was due to repay in mid-December.
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Many banks and investors had assumed that Dubai World would not get into a situation where it was struggling to repay debt because the high-profile company would be bailed out either by its parent state or by Abu Dhabi. When that did not happen, international stock and credit markets went into turmoil. It raised fears that not only could Dubai World default but the Government and other state-owned entities might also default on their $80 billion of loans. The cost of insuring Dubai’s debt rocketed from about $380,000 per $10 million to $675,000 in three days.
The Government of Dubai clarified its position at the start of this week saying that it would not bail out Dubai World, effectively abandoning the company to its fate. Dubai World will meet creditors next week to discuss plans to restructure $26 billion of the company’s debt.
It has emerged that British banks were the largest international lenders to Dubai World, with Royal Bank of Scotland estimated to have a £500 million exposure. HSBC and Standard Chartered are rumoured to have exposures of up to £300 million each. Barclays is not thought to have a significant exposure.
The failure of Dubai and Abu Dhabi to bail out Dubai World has surprised many anaysts, who assumed the Gulf states would not risk allowing one of their entities to get into trouble.
Barclays said on November 4 that political backing from Abu Dhabi would underpin support for Dubai’s debt. The bank’s analysts added: “We expect several developments to act as positive catalysts for Dubai’s sovereign spread. First, the likely repayment of the Nakheel sukuk in December.”
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Three weeks later, the analysts changed their minds and said: “The credibility of Abu Dhabi to support Dubai with respect to its financing needs is dented, in our view, eroding the main pillar of Dubai’s creditworthiness.”
A spokesman for Barclays declined to comment.
? Saudi Arabia’s top monetary official sought to reassure investors and play down the impact of the crisis ahead of the first day of stock market trading in the Kingdom since last Wednesday. Muhammad al-Jasser, governor of the Saudi Arabian Monetary Agency, said: “There are no risks [and no reason] to exit the market or sell any shares because of this problem.”