Insuring Dubai Holding debt rises

DUBAI // The cost of insuring Dubai Holding debt against default has risen over the past two weeks despite what analysts say is evidence that it can meet its immediate obligations. Concerns have risen about Dubai Holding since its sister company Dubai World announced in November a debt restructuring.

Credit default swaps (CDS) for Dubai Holding Commercial Operations Group (DHCOG) have climbed 14 per cent since December 15 to more than 2,000 basis points or 20 percentage points, according to data from CMA DataVision in New York. That means it costs more than US$2,000 (Dh7,346) to insure $10,000 worth of Dubai Holding bonds. Dubai Holding has an estimated $15 billion of debt. Less than a fifth of that is owed by DHCOG, while three quarters is owed by Dubai Holding's private equity arm, the Dubai Holding Investment Group. Analysts say DHCOG has already received government emergency funds, leaving it with about Dh2bn in cash to help repay about Dh3.2bn they estimate it owes over the next six months.

A spokesman for the company said Dubai Holding executives were unavailable for comment. Analysts say the sudden surge in concern about DHCOG may reflect a more general retreat in appetite for risk among global investors. With the end of the year approaching, many market participants are already on holiday and others are unwinding positions to close out their books for the year. But the moves also come amid a growing realisation that Dubai is preparing to force its creditors to share some of the losses it has suffered in the wake of the financial crisis.

Investors began scrutinising Dubai Holding after November 26, when Dubai announced that it was stepping in to restructure Dubai World, appointed its own restructuring executive and said it would ask Dubai World's creditors for a six-month standstill on debt repayments. The announcement shattered hopes that Dubai, and by extension the UAE and the emirate of Abu Dhabi, were standing by to ensure that any debts of a state-owned entity would be paid in full.

The global financial crisis and the drop it triggered in the Dubai property market - where average prices fell by as much as 30 per cent - have made it more difficult if not impossible for some companies to come up with enough cash to service debts incurred during the boom. In the wake of Dubai World's announcement, credit ratings agencies downgraded their assessment for debt of many state-owned companies, arguing that they could no longer any government support. Moody's lowered its rating for DHCOG to below investment grade the day of Dubai World's announcement and its two competitors, Fitch Ratings and Standard & Poor's, followed suit earlier this month.

While Dubai Holding is not government-owned, it is owned by Sheikh Mohammed bin Rashid, the Vice President of the UAE and Ruler of Dubai, and controls his personal assets. Dubai Holding CDSs soared after the Dubai World announcement, nearly doubling. They climbed by another two thirds when Dubai Holding's credit ratings were lowered. Even so, Moody's and S&P have said they believe Dubai Holding has enough cash to meet its immediate debt repayments. S&P said the company had already received assistance from the Dubai Financial Support Fund, which is in charge of doling out the $21bn in funds Dubai has raised so far selling bonds to the Central Bank, Abu Dhabi and Abu Dhabi banks.

S&P said DHCOG was sitting on Dh2bn in cash at the end of October and faced debt repayments equivalent to about Dh3.2bn between now and the end of June, including a $555m credit facility due that month. Dubai Holding's other large, imminent obligation is a loan of about $600 million loan due to be repaid in June by Dubai International Capital. In a report earlier this month, however, analysts at Barclays Capital warned clients that Dubai Holding could be "next in line" to restructure its debts. And Morgan Stanley issued a report earlier this month saying that Dubai World could be followed by other member of Dubai Inc. As much as $12.3bn of Dubai Holding's debt could be subject to restructuring, it said, under a worst-case scenario.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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British aristocrat Lord Carnarvon, who funded the expedition to find the Tutankhamun tomb, died in a Cairo hotel four months after the crypt was opened.
He had been in poor health for many years after a car crash, and a mosquito bite made worse by a shaving cut led to blood poisoning and pneumonia.
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Insuring Dubai Holding debt rises

Credit default swaps have climbed 14% since December 15 to more than 2,000 basis points.

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