The cost of insuring five-year Dubai debt against default jumped to its highest level since March on Monday as concerns intensified over the debt restructuring of state-owned conglomerate Dubai World. Nervousness over the fate of Dubai World debt grew after Dow Jones reported it was mulling a two-part deal, including one that may repay lenders 60 percent over seven years.
Dubai denied the report on Sunday but investors, already spooked by a lack of information on the company's plans to repay the debt, reacted with dismay to the reported proposal. The five-year CDS rose as high as 651 basis points, according to CDS monitor CMA DataVision, above the high reached after the Dubai government announced a standstill on debt held by Dubai World in November.
This means it costs $651,000 a year for five years to insure $10 million in Dubai debt. CDS prices of 1,000 bps are generally equated to distressed debt. The rise in the CDS was also partially driven by a perceived rise in sovereign risk, in the absence of a specific euro zone bail-out plan for Greece. "The reaction to Dubai is related to the sentiment on Greece," said Okan Akin, emerging credit strategist at RBS. "There's lots of uncertainty, the time of reckoning is approaching."
Dubai World is in talks with banks on the debt delay - about $22 billion linked to its main propery units Nakheel and Limitless World - but bankers say it has yet to present a formal proposal. The next hurdle for the conglomerate is the repayment of a $1.2 billion syndicated loan for its subsidiary Limitless, which matures on March 1.
Dubai World staved off default on a $4.1 billion Islamic bond linked to Nakheel, after a last minute bailout from Abu Dhabi in December. The price of Nakheel's Islamic bond maturing in January 2011 fell 3.5 points to 50 on Monday, according to Reuters data. United Arab Emirates interbank offered rates have also been rising in recent weeks, reflecting the anxiety. "When there is a time of uncertainty, people want to hold onto cash," said Akin.
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