RBS Led Dubai World Lenders; HSBC Most at Risk in UAE (Update2)
Vivian Salama and Gavin Finch
Nov. 27 (Bloomberg) -- Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, the state company seeking to reschedule debt, while HSBC Holdings Plc has the most at risk in the United Arab Emirates, according to JPMorgan Chase & Co.
RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report today, citing Dealogic data. HSBC, Europe’s biggest bank, has the “largest absolute exposure” in the U.A.E. with $17 billion of loans in 2008, JPMorgan said, citing the Emirates Banks Association. Abu Dhabi Commercial Bank PJSC may be owed $1.9 billion by Dubai World, making it the largest creditor outside the emirate, said two people familiar with the companies.
“The market is very nervous about exposure to Dubai and RBS’s name has been associated with it as both a lender and a book runner,” said David Williams, a banks analyst at Fox-Pitt Kelton Ltd. in London. “People are concerned it’s going to produce a new wave of losses. Dubai is driving everything in the market at the moment.”
Stocks around the world have slumped for two days on concern a debt restructuring by Dubai World, with $59 billion of liabilities, will add to the $1.72 trillion of losses and writedowns from the global credit freeze. British banks have the most to lose among international lenders from a crisis in the United Arab Emirates, with a combined $49.5 billion of loans outstanding, according to a report from RBS that cites Bank for International Settlements data published in June.
‘Disruption and Uncertainty’
U.K. Prime Minister Gordon Brown’s government is monitoring the situation in Dubai, his spokeswoman said today.
“Clearly the restructuring announcement has caused disruption and uncertainty in world markets,” Brown’s spokeswoman Vickie Sheriff told reporters in London. Brown’s “view is that U.K. banks are well capitalized having undergone rigorous stress testing,” she said.
Dubai World, controlled by the emirate’s ruler, Sheikh Mohammed Bin Rashid Al-Maktoum, borrowed from more than 70 lenders to buy assets ranging from stakes in Las Vegas casino company MGM Mirage to London-based Standard Chartered Plc through Istithmar PJSC. The government said this week it will seek a “standstill” agreement to delay repayment of its debt, including $3.52 billion of bonds due Dec. 14 from property unit Nakheel PJSC.
In Contact
“We are in touch with Dubai World, and we have been in discussions more than once today and yesterday,” Ala’a Eraiqat, the chief executive officer of Abu Dhabi Commercial, the third- largest lender in the United Arab Emirates, said in a telephone interview yesterday. He declined to comment on specifics. “We have a lot of assurances which is a good thing.”
RBS spokesman Piers Townsend in London declined to comment. The bank had 4.98 billion pounds ($8.15 billion) of loans and advances outstanding to the UAE at the end of the first half, according to company filings. That included 2.7 billion pounds of corporate loans, 1.65 billion pounds to banks and financial institutions and 596 million pounds to consumers.
HSBC’s loans and advances to customers in the U.A.E. totaled $15.9 billion at the end of the first half of 2009, while deposits stood at $19.3 billion, according to the U.K.- based bank’s 2009 interim results. Jezz Farr, a London-based spokesman, declined to comment on Dubai.
Syndicated Loans
Dubai World borrowed $13.5 billion in syndicated loans in 2007, according to JPMorgan’s report. Banks “typically retain 10 percent to 20 percent of the originated loans and use collateral or hedges,” JPMorgan wrote.
RBS shares rose, reversing losses of as much as 10.2 percent to gain 5.8 percent as of 2:35 p.m. in London. The shares fell 7.8 percent yesterday.
HSBC dropped 7.6 percent in Hong Kong, the most since March 9, and was up less than 0.1 percent in London. It slipped 4.8 percent yesterday. Standard Chartered slid 8.6 percent in Hong Kong, and 1.8 percent in London, extending yesterday’s 5.8 percent decline.
Goldman Sachs Group Inc. analysts led by Roy Ramos estimated potential credit losses at HSBC related to Dubai World may be $611 million, and $177 million for Standard Chartered, according to a research report released today. The impact on both banks will be “manageable,” the analysts wrote.
Standard Chartered spokesman Jon Tracey said the bank was “fully aware” of disclosure obligations and would make a statement in the event that it had “anything material to disclose.”
‘Immaterial Exposure’
Credit Suisse Group AG’s “exposure is immaterial,” said Zurich-based spokesman Marc Dosch. Calyon, the investment banking unit of Credit Agricole SA, has less than 300 million euros ($447 million) of “exposure to Dubai’s debt,” spokeswoman Anne Robert in Paris said. Natixis SA has $50 million of exposure to Dubai World and “no significant” risks related to Dubai real estate, said Elisabeth de Gaulle, spokeswoman of the Paris-based bank.
Sumitomo Mitsui Financial Group Inc., Japan’s second- largest bank by market value, may be owed at least $225 million by Dubai World, according to people familiar with the matter. The lender said in a statement it has “exposure” to Dubai World, without giving details. The company said it hasn’t changed its financial forecasts. Mizuho Financial Group Inc. may be owed about $100 million, the people said.
Sumitomo Mitsui dropped 3.7 percent at the close in Tokyo and Mizuho declined 3.9 percent.
Property Collapse
Dubai borrowed $80 billion in a four-year construction boom that transformed the sheikhdom into a regional tourism and financial hub. It suffered the world’s steepest property slump in the global recession, with home prices dropping 50 percent from their 2008 peak, according to Deutsche Bank AG.
“We understand the concerns of the market and the creditors in particular,” Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, said yesterday in the first statement from the government since it announced the debt rescheduling. “However, we have had to intervene because of the need to take decisive action to address its particular debt burden.”
More information will be “made available early next week,” he said.
Fundraising
Dubai World had $59.3 billion in liabilities and $99.6 billion in assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. Dubai has a total $4.3 billion of government and corporate debt due next month and $4.9 billion in 2010’s first quarter, Deutsche Bank data show.
“The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear,” said Arnab Das, London-based head of market research and strategy at Roubini Global Economics. “Of course, Dubai had a lot of the excesses during the bull market.”
Dubai is one of seven sheikhdoms in the U.A.E. Abu Dhabi, another of the emirates, holds 8 percent of the world’s oil reserves and bought $5 billion of bonds sold by Dubai this week through state-controlled banks. Sheikh Mohammed turned to Abu Dhabi’s central bank on Feb. 23 to raise $10 billion selling debt.
Dubai World’s biggest creditors are Abu Dhabi Commercial and Dubai-based Emirate NBD PJSC, the United Arab Emirates’ biggest lender by assets, according to two people familiar with the situation who declined to be identified because the information isn’t publicly available.
‘Horse Trading’
Abu Dhabi Commercial has also lent to Saad Group and Ahmad Hamad Algosaibi & Bros Co., the Saudi Arabian family companies that defaulted earlier this year. Abu Dhabi Commercial fell 31 percent from Sept. 17 to Nov. 1 after the bank said it was owed a total $610 million by the two companies. The stock has risen 22 percent this month. The market was closed for a second day today for the Eid Al-Adha religious holiday.
“Nobody can know how much exposure these banks have got to Dubai unless they choose to tell you themselves,” said Simon Maughan, an analyst at MF Global Securities Ltd. in London. “I don’t think Dubai will default, however. Once there’s been a bit of horse trading over the weekend, Abu Dhabi will step in and bail out Dubai.”
Ratings Cut
Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies this week, saying they may consider Dubai World’s plan to delay debt payments a default.
Fitch Ratings downgraded long-term issuer default ratings of Dubai-based Tamweel PJSC by three steps to BB, two levels below investment grade, and cut Taib Bank of Bahrain to BB from BBB- today.
The plan “is a reminder that there are still issues out there that have yet to be resolved,” said Colin Morton, who helps manage $2 billion at Rensburg Fund Management in Leeds, England, including HSBC and Standard Chartered stock. “It may take weeks to know the full exposure and what it means.”
The cost of protecting Dubai bonds against default has soared to the fifth highest worldwide yesterday, exceeding Iceland’s and Latvia’s, and climbed to 687.5 basis points today, after the biggest increases since the credit-default swaps began trading in January, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped 167.4 basis points to 776.
The default swaps on Abu Dhabi rose 24.5 basis points to 184.5, Qatar climbed 17 to 131, Malaysia was up 13 at 117, Korea increased 11.5 to 114.5 and Greece was 3.5 basis points higher at 212.5, CMA prices show.
The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.
The price of Nakheel’s bonds fell to 50 cents on the dollar from 71 cents yesterday and 107 cents a week ago, according to Goldman Sachs prices on Bloomberg.
To contact the reporter on this story: Vivian Salama in Dubai vsalama@bloomberg.net
Last Updated: November 27, 2009 10:14 EST