Dubai World's progress spurs investors

FInancial markets react positively to expectations that Dubai World is nearing a proposal to resolve its debts.

Expectations that Dubai World is closing in on a proposal to resolve its debts are already providing impetus to financial markets, which have underperformed their global peers for several months. Stock markets have recovered steadily since hitting bottom in January even though analysts predict further losses on bad loans and slow growth in new lending.

As the debt restructuring talks entered a more advanced phase, the cost of insuring against the default of Dubai Government debt declined by 0.11 percentage point to 4.73 per cent yesterday, meaning it would cost an investor US$47,300 (Dh173,720) to insure $1 million of debt. The figure is down from more than $50,000 for $1m of debt at the beginning of the week. Dubai World has begun to meet banks to discuss restructuring options on $22 billion of its debt, but the details of its proposals have not been made public. They may include a partial repayment or full repayment at below-market interest rates, according to sources familiar with the talks.

A source at Dubai World said a formal restructuring proposal has yet to be made, but would be coming after the talks with banks. The company is aiming to make official proposals by the end of this month, the source said, but the process could be delayed until the end of next month, depending on the speed of negotiations. While talks are under way, there could still be obstacles ahead. Questions remain, for example, whether the Central Bank, which subscribed to a $10bn bond issued by Dubai last year to help tide it through the early part of the downturn, would be resistant to the idea of sending more money to the emirate as Dubai World's restructuring progresses.

Another possible obstacle is the idea of refinancing the debt with a below-market interest rate over a long period. Dubai World may ask to resolve its debt issues by agreeing to pay the principal amount in full but with little or no interest, a proposition banks may baulk at because it would mean they would have to take losses over a drawn-out period. Bond markets were also cheered by the apparent progress at Dubai World. The price of an Islamic bond issued by Nakheel, the Dubai World property unit, rose yesterday by 1.5 points to 62 cents on the dollar, according to Reuters data. The bond's price has risen 13 points since the beginning of the month.

Stock markets in Abu Dhabi and Dubai, meanwhile, both posted steady gains throughout the week on the back of the news. Traders absent from the markets since Dubai World said it would seek to delay repayments on $26bn of its debt have begun to come back to the exchanges, which have seen volumes increase in recent weeks. [e-mail] [e-mail]