Dubai World debt deal expected to trim cost of borrowing

Reestructuring could help other UAE companies borrow more cheaply

An agreement between Dubai World and its creditors on restructuring the conglomerate's debt could help other UAE companies borrow more cheaply, says the chief of the country's largest lender. Also yesterday, the bank, Emirates NBD, reported a drop of 12 per cent in net profit for the first quarter, but it beat analysts' expectations.

Rick Pudner, the chief executive of Emirates NBD, said he considered the 8.5 per cent interest rate on the latest corporate bond from Dubai to be too expensive. "The recent benchmark of 8.5 per cent is not a price we would like to issue at. But hopefully, once Dubai World is finalised, we are looking at an improvement in pricing," Mr Pudner said. Emirates NBD does not need to tap the capital markets as it could repay all of its medium-term loans due this year, he said.

Less than two weeks ago, the Dubai Water and Electricity Authority (DEWA) became the first Dubai-related entity to issue debt since Dubai World said in November it would restructure its debt. DEWA is paying 8.5 per cent interest on a US$1 billion (Dh3.67bn) bond. Mr Pudner said the debt restructuring talks with Dubai World were "progressing very positively. A resolution will certainly be reached within a few weeks". The conglomerate must restructure $24.8bn of debt.

Emirates NBD, one of Dubai World's largest local creditors, is believed to be helping lead the local banks' efforts to improve the terms of Dubai World's restructuring proposal. The bank, which is the country's biggest by assets, is majority-owned by the Dubai Government. Sanjay Uppal, the chief financial officer of the bank, said he expected its bad loans to peak at about 3 per cent this year. Emirates NBD's bad loan ratio rose to 2.63 per cent last month from 2.36 per cent at the end of last year. "All the Dubai Inc and core government loans are current and performing," Mr Uppal said.

Emirates NBD has traditionally been underweight on lending to small and medium enterprises, which are more likely to default in hard economic times. The bank also extends many loans to government employees and UAE nationals, he added. "All of that helped us maintain a certain edge." In its earnings report, the bank said net profit declined to Dh1.11bn, down from Dh1.26bn in the first quarter of the previous year.

Emirates NBD is the first major UAE bank to report lower earnings for the latest quarter, as First Gulf Bank, Abu Dhabi Islamic Bank and Commercial Bank of Dubai have all posted gains. Bank earnings are being scrutinised to see whether businesses and consumers are taking out new loans to support an increase in economic activity. Emirates NBD said its deposits rose 6 per cent in the latest quarter, while its lending fell 1 per cent. Mr Uppal blamed this on a general trend to reduce borrowing. "Retail customers are reconsidering their levels of leverage. We expect that to continue through 2010."