Confidence returns among bond holders following the debt restructuring announcement for Dubai World and Nakheel. The Emirate of Dubai's 5-year CDS spreads fell by 9.4 percent to 383 bps and the trading price of Nakheel's bond (maturing in January 2011) increased to 94.4 cents to the dollar. Markets rebound, but the rally began late last February. The DFM was the best performing market Thursday , rising 4.3 percent, followed by Abu Dhabi at 1.1 percent. The market had already begun pricing in a positive announcement which is evident from the 18.6 percent rally in the DFM index from Jan. 26. Dubai was also the best performing market among the leading GCC exchanges, having returned +15.8 percent, significantly higher than Qatar, which was the second-best at 7.9 percent. “We believe that the news is more positive than what the market expected with immediate positive implications for credit and equities,” Credit Suisse said. “Yesterday's prices of 70 and 67 for Nakheel 2010 and 2011 bonds, suggested the market was pricing in 40- 45 percent haircuts. Clearly news that both bonds will be paid in full on maturity was completely unexpected,” it added. Although there is some risk given Dubai government has said that the offer to pay Nakheels bonds in full is contingent on banks and trade creditors accepting the proposals made to them, Credit Suisse believed there is a very good chance the proposals will be accepted given that they seem much better than expected. Equities began to price-in a positive outcome late February. “We believe the market had already begun pricing in a positive announcement which is evident from the 18.6 percent rally in the DFM index from Jan. 26. However, the DFM index was up 4.3 percent today, as the positive news is not fully priced in.” The move was a relief for contractors and banks. Trade creditors and contractors will be offered 40 percent of their outstanding payments in cash and the remaining 60 percent in tradable debt securities paying commercial rates. “This is positive news for contractors as depressed valuations suggested that the market was pricing in almost no recovery for receivables from Nakheel and other GREs.” Moreover, Credit Suisse said the banking sector is well capitalized and the news should be particularly positive for ENBD and ADCB, who have the largest exposure to Dubai World among local banks as estimated. However, Credit Suisse said that if Dubai is to inject $9.5 billion in Dubai World and Nakheel, there might not be much cash left from currently available funds for unfinished real estate projects by other developers such as Dubai Properties, funding fiscal deficit for this year and the next, and potential restructuring for Dubai holding which is the next box to tick after DW. “ Although we believe this may result in a need to issue bonds, the government said that there is no intention to issue any bonds in the near term,” it noted.
