Saturday, February 28, 2009

But $10 billion just isnt enough

This from Barclays Capital. Interestingly, they too seem to think that $10 billion will be enough to tide Dubai over, even though they are calling for further measures "to strengthen financial stability" in the UAE. This would presumably mean an expansion of the capital injections into the Abu Dhabi banks to include all UAE banks. 

But this is the problem. Dubai needs more money. $10 billion wont even cover its repayments this year, let alone the billions that the parastatals owe to contractors. Profits will be scarce if not non-existent this year, especially for companies such as Nakheel and Emaar, so they are dependent on the government to step up to the plate. The cost of bailing out the non-bond debt of Dubai Inc could even match the $80 billion of foreign credit exposure.

Again, $10 billion isn't nearly enough. Presumably the brighter sparks in government realise this, so why the ambiguity on the second $10 billion tranche? The first underwriting tranche may well signal that Abu Dhabi stands behind Dubai, but will they still do so when the cost of the bail-out soars? Will Abu Dhabi put its good money into bad firms like Nakheel, Emaar, or Dubai Holding's various satellites?

BarCap: This week’s announcement by the Dubai Government of a $20bn bond issuance cleared much of the uncertainty surrounding Dubai’s debt refinancing in 2009. The UAE central bank’s subscription to the first USD10bn tranche should help repay much of the nonbank sovereign and quasi-sovereign foreign currency debt maturing over the next 12 months. (which we estimate at USD 11.5bn)

It also confirms in our view the indisputable support to Dubai and its government-owned institutions by the federal level, backed by Abu Dhabi. This prevents possible default scenarios, in spite of the sharp slowdown in growth witnessed there. While the timing of the second tranche and its expected investor base remain unclear, we expect this move to drive credit spreads tighter and help ease the pressure on some of Dubai’s major banks, whose exposure to Dubai Inc entities is significant.

We also look out for further measures by the authorities in the next few weeks aimed at bolstering liquidity in the financial sector, by having the federal Ministry of Finance release and possibly expand the size of the third and final facility tranche. Following Dubai’s debt placement with UAE’s central bank the authorities may follow up with measures to strengthen financial stability.

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