Thursday, December 31, 2009

Banking Report: Analyzed

The EFG Hermes report on some of the banks is interesting by all means, while not aimed at a credit assessment but more at stock performance, it nevertheless presents a balanced view. While there are some notable exceptions in the report I have seen, like Mashreq and Union National Bank (my former bank), it does make the point that the current financial woes are not as bad as they sound. The 3rd quarter performance of the banks was better than expected and judging by the analysis the banks that appear as laggards in their analysis are not on account of credit issues but more management style and focus in terms of the economic segmentation they pursue for earnings. While I am a traditionalist who would not rely on inter bank borrowing to fund the loan book, I concede in the ten years I have been out of managing a bank a great deal has changed. While back in the 1990's international banks panicked at the slightest political trouble in the region, the trend since then has been more mature and banks do not cut lines at the slightest of whims as they used to back then. Thus inter bank funding is more stable and can be seen as a factor in funding the loan books of banks, even though I was surprised that some banks from the sub continent got over cautious through the recent Dubai World crisis and while not cutting exposures to the country did have a 'wait and see' policy.

Indeed it was interesting that their analysis of the Dubai Inc (a loose word to describe all the debt of Dubai Government and the GRI's) is spot on in mentioning that while the numbers seem significant, even to GDP, there are two aspects that need consideration, a) the surplus cash flow of the good companies can be used through the parent structure mechanisms to help the weaker ones. and b) there are a number of assets that are eventually available for a sell off or privatization, (though they don't make these two points-that is how I read it). The current restructuring is a major element of this conundrum that needs to be solved and for this I would urge the Dubai World and the government to set a much faster pace to come to a settlement with the banks on this issue.

While the financial press have made a big deal, even today, about the support that has come from Abu Dhabi and hinted about it not being available in all circumstances (see today's FT) they forget that no support can be a carte blanche and has to be discussed on the merits. Interestingly yesterday an Abu Dhabi official spoke to Moody's Investors, as they have reported, and discussed that they have more than twice the reserves of the whole UAE public sector debt (assuming even the GRI's) in just one entity, to which if you add the Central Bank reserves and the other assets held by UAE entities the situation is more than comfortable. This is where I get so frustrated with reporters than they miss the big picture. Abu Dhabi thinks of the country as a whole, and eventually will be there to stitch things up, perhaps at a cost but it will be done.

The analysis of the banks in each of the cases is interesting. It is heartening to note that banks like EmiratesNBD and National Bank of Abu Dhabi still figure out as the strongest and the impact of either one of them of the current situation is minuscule. EmiratesNBD with a captial adequacy of near 20% and a provision of 95.5% of loans actually stands out better than Moody's would have us believe just two weeks back. None of the banks in terms of their capital adequacy numbers or coverage for non performing loans seem to be a problem. It is highly likely that into the mid of 2010 we may find over provisions on most of the balance sheets, which I strongly advise the bankers not to move back into profits. This will offset some of the need for higher provisioning on the general commercial and personal lending portoflios that may have suffered through the slow down.

In the end the macro economic scenario will play an important part. Higher liquidity, small to medium sector finance availability, and better respositioning of the asset-liability mismatch, which plagues all banks in the region, will ensure a stable to better year ahead. Significant in this process will be the following factors:

a. Better GDP performance.
b. Stability on the issue of the debt restructuring.
c. Middle market performance being better, i.e. trading, retail and services.
d. A steady real estate market, which while overburdened with supply will still gradually get over the panic stage.
e. A greater awareness of UAE position as a regional hub for business.

While I am not predicting major new avenues of business income for the banks in the year ahead, i.e. IPOs etc, I do feel that they will protect their market share better, hoping a better corporate and government sector performance will offset a weaker personal debt performance in the year ahead. Banks who manage to address the asset-liability mismatch early into the year will find themselves lighter on their feet and more nimble to take advantage of a recovery.

In terms of safety of the banking system I have the least of worries. No Bank incorporated within the UAE has ever been allowed to go under. (BCCI was not UAE incorporated and interestingly according the Sept 2009 Liquidators report of that failed bank 81% of all creditors have been paid, which must be some sort of a record as normally failed banks struggle to pay off 40-50%). I am positive of this that the UAE cannot and will not let a bank fail, to which is added a better regime of regulatory control and a more mature management in most banks.

How do I see the year ahead for the banks? In a nutshell: stable to better performance, dealing with the recent past bringing cheer with each successful settlement or restructuring and in terms of safety pretty much at the top of the definition of 'prime quality'.

Monday, December 28, 2009

What happens Next: Part B

Just about the time I had posted the last blog, I read about a prominent World Bank official speak about Dubai and the future. Indeed I endorse the views of the learned World Bank official, especially on a number of issues. Most importantly the feeling that the debts that are maturing in the year ahead will be met and it would add that it is unlikely that the fiasco that was caused by abrupt announcements will happen again; all the more because lenders and the borrowers are in discussions.

However, some underlying anomalies within the economic system need to be corrected, and while this may take time, the building blocks needs to be put in place surely soon. One of these basic steps is to consider these measures, obviously in more detail than a blog can narrate, and then take a concerted view on the matters. I do feel that the economy has, since 2001 become highly skewed in two directions:

a. The private sector contribution to the GDP being an abysmal 13% imply that either government or government related entities were fueling the pace of the GDP growth. The result was that sectors like Hospitality (Jumeriah Group), and Real Estate (Nakheel, Emmar, Dubai Properties and others) were the dominant players and hence in a sense creating a huge concentration of rapid growth in the semi public sector or public sector hands. While as an impetus to start things off this is not a bad idea at all, but at some stage the diversification of this process into private hands through IPO's should have been considered.

b. The development cycle was being fueled by a high debt level, as most of the real estate developments involved infrastructure build out and the pace of planning outstripped the resources needed, resulting in a scramble for debt to fuel the engine. This was at no time seen in a broader perspective perhaps even considering inviting the private sector into a utility model to build the infrastructure, as is done in a number of countries.

This propensity of concentration in the sectors mentioned and the leveraging of the debt has to go through a process of de-leveraging and privatization. Ofcourse both these avenues pose some unique problems.

De-leveraging can only work with liquidity and appetite available for restructuring the loan profiles of the current debt, and this seems to be under way. However, privatization in the current market has to be put on the back burner. I personally think that this is somethign that should be given thought to.

Here is what I would do.

Announce soon after the debt resconstruction that the privatization is an option and to float mezzenine funds to take equity positions in some of the assets with a clear idea that within say 24 months the privatization will occur. This wll give the market the confidence that is needed, redress the private sector contribution to the GDP and most importantly decouple the existing situation. Yes it sounds simple, but it is actually something that needs planning and can be done selectively. eventually the government or GRE's can own about 30-40% of the entties and sell off the rest. I suspect the cash flow from these would be ample to redress the existing situation.

I believe some assets are perfect for this strategy, i.e. the hospitality sector, while others may have to be repaired and their timing of privatization may well be in the end of 2 years from now. But the intent itself, if made public, brings about the interest in the private sector, demonstrates a will to take structural measures to fix things and most of all shows the world the way out of the situation.

Saturday, December 26, 2009

2010: What happens next?

After the turbulence of 2009, human nature expects the new year to be one of positive difference. If 2008's ending weeks were tinged with the hope that the GCC economies would survive unscathed 2009 proved them wrong, as the Al Gosaibi debt issue, the Dubai World surprise and the general battering of UAE credit ratings by rating agencies brings 2009 final days with a gloom that focuses ofcourse on the hope all will be well. Yes I have mentioned the silver linings that accrue in this over cast moment of the regions financial landscape. While we can all hope for the best, there has to be a concerted effort to put into place the elements the will change the financial topography for the region. This does imply what are the likely events or processes that will change the economic outlook.

Here is a mind map of what perhaps will happen.

1. The Dubai World Debt.

Indeed this has been and will be the prime issue that the financial and media world will focus upon. It is crucial to the well being of the economic system for the region, and most importantly, it is where the confidence of the financial community can be best restored. I believe it is important that the banks and lenders agree to the restructuring of the Dubai World debt, whether through their negotiations with the company or through some prodding from the government, both Dubai and the Federal government. Indeed, Abu Dhabi assistance is already implicitly tied to the lenders agreeing to a restructuring and thus I do feel bankers and lenders will not be so short sighted as to scuttle a settlement merely to get brownie points. I believe there might be a few hiccups but in the end the settlement will be hammered out and a restructured debt will provide the breathing space to improve the repayment capacity down the road. I believe also that a successful deal with the lenders will allow either Abu Dhabi, Dubai government or the Federal Government, or a combination of them all, to be more forthcoming about their plans in a restructured environment.

2. Oil Prices.

The current bet is that an oil price hike would slow down the recovery in the US and Europe and hence derail any recovery that we have seen thus far. My own opinion is that a better economic performance from India and China will bring in a higher demand for oil, and a gradual up tick in the US and European economy will also add to the demand side of oil. I foresee a $15 increase, on average, for the price of oil in 2010, with a possibility in the summer for even a higher spike based of inventory management and constraints in stockpiles. Added there could be tensions between Iran and the West that could well add to the upward pressure on oil prices. The political dimension to oil prices is hard to follow and while most predict Iraqi oil production improvement could well keep a lid on oil prices, my own feeling is that we are a bit complacent about oil prices and it could well be a benefit for the region adding to the reserve pools of the sovereign wealth funds.

3. Increased Government spending.

I do believe Saudi Arabia, UAE and Qatar within the GCC, and Iraq and even Iran, outside the GCC, will be investing more into infrastructure, health and education. The first two countries have already announced major plans for power, railway and roads and health care upgrades. These are massive investments which will become the base of economic recovery for the region. Though it may well be that the fruits of these spending programs may not show up immediately there is no denying that it will set the stage for the decade. UAE's announced investment into nuclear based power generation already promises to benefit the region and indeed the US and European suppliers of technology.

4. Revenue Leaders.

If property was the revenue leader for the region in the past decade it is clear that new revenue leaders will emerge. I feel the service industry and the trading sector will come back into the limelight, with tourism becoming a new major revenue earner for the region. The model of an enabling economy in the UAE, through which the service and trading sector can thrive has been a tried and tested model and all we have to see is the return to those values as the prime drivers of the economy. In addition the attention that has been put into creating tourism as a destination driver for UAE there is the promise that this could well be the new bright star for economic performance. Countries like Oman who have a very rich tourist content will also begin to play this card more effectively, resulting in a broad based attraction for the region. I also feel in some ways manufacturing will become more important as more electric power is available in the years ahead, allowing the strategic advantages of the region coming into play.

5. Financial Performance.

I do believe banks will continue to be burdened in their performance through the effects of the past two years. There is alot of clean out of these balance sheets and that may well be the focus for the years ahead. I know that banks are in better shape than our rating agencies would like us to believe, but their focus on asset management will be more crucial then trying to get run away performance numbers each year. I also believe banks will have to change the way they compensate their senior staff as some bonus schemes only implied that the more risk they took the higher their bonus. I do however feel that the stock markets will do better than they have recently and while the maturity of these stock markets is still doubtful with true depth and two way liquidity still down the road attention towards superior performance compared to other markets is on the cards.

I do feel in addition some important steps need to be taken for the year ahead. Paramount to this would be the setting up of a 'think-tank', perhaps sponsored by the banks, to bring in the mind power to frankly and openly discuss the issues that face the economy. I also believe that people within the UAE government also recognize that there are many here, both Emirati and expatriates, who may not agree with some of the ways things are handled, but their sincerity and care for the country should not be questioned. I believe a broader base of discussion is what will improve the understanding.

Yet we have to understand that there will always be the cynics, like some of my banker friends who call me to tell me how bleak things are, and there will be the over enthusiastic admirers who will pretend there was no problem. Perhaps the truth is squarely in the middle, and this is perhaps why I ask for balance, not hysteria, for understanding rather than idiocy, for patience rather than panic, and most of all, when in doubt 'ask' do not 'guess'.

My single line call for 2010: 'Will be an anxious year, with more reasons to cheer than weep."

The Silver Lining.

Telling someone that one is based in Dubai, or the UAE, these days is tantamount to admitting that one is under the strains of a financial system that is groaning under debt and piles of newspaper analysis, which range from brilliant to pure junk. While there is not doubt that the fall out from Lehman Brothers in the US in September 2008 took a while to be understood in UAE and the Gulf, especially in terms of its possible impact. This was certainly the case of most countries in the world who felt the US economic problems were isolated and their global impact would be marginal. How wrong we all were, as it was often said when the US economy sneezes the world economy catches a cold; in this case this is not a cold, this is full blown bronchitis.

Dubai perhaps was in a state of denial as to the impact that was seething below the surface, with prominent officials making upbeat statements right into the face of the storm that was approaching. But enough of the dissections of the situation. I believe that this situation has caused some benefits that might well be ignored by people. I believe these are the silver linings on the clouds that need to be seen and pondered upon. I list them in no particular order of preference.

1. Governance and transparency will become the watch words of the coming decade. The UAE as a whole, and Dubai in particular, has, reading between the lines, realized that the maverick ways of doing business will not just work from here onwards. Yes they have a wonderful vision but with that vision a sense of clarity and focus are to remain paramount. A greater adherence to critical reviews and financial planning will be the result of this. I believe, at a Federal level, the UAE will want to monitor how their financial system, and more importantly the quasi government entities conduct their business will be under more closer review and oversight.

2. Dubai will need to go back to the basics. Traditionally the soul of Dubai's economy was the commerce generated by the trading houses; it is this sector that was ignored in the rush to become a metropolis of high rise buildings. It has been the trading hub that Dubai gained its reputation on and this is where the superior infrastructure in terms of ports and facilities will come into play. As demand grows in the Sub Continent, Iran and Iraq the service ability of UAE and Dubai will become of paramount importance giving the traders the traditional advantage they have held for so long.

3. Dubai's underlying story has not been shattered, it has been ofcourse seriously dented, and the repair work is going to be on the back of a restructured financial position, focusing back to the enabling economy model that allows businesses to thrive and do well here. The financial hub, the technology hub and the trading hub status will come back into focus. While pundits predict that properties will remain subdued, I anticipate from 2010 a 5% annual rise in property prices, on average, through the next 6 years. While this may seem minuscule to the dizzy levels of a couple of years ago, so be it. Some smart Germans even announced they will proceed with their development on the World Islands, perhaps aware that when in 3 years time they complete construction they will be walking into a recovery.

4. The focus of a more Federally driven economy will be the key aspect to consider. This is indeed good and this crisis has brought focus back to one nation and one economy as a model for moving forward. This cannot be bad for the economy and its future, and I do feel all these statements about political compromises are really humbug. This new economic focus on a Federally driven economy will actually benefit Dubai in more ways that one, mostly by allowing the integration of the infrastructure covering areas of public transport, power generation and perhaps eventually ports management.

5. UAE position within the GCC as the most favored place to do business from has not been compromised in this crisis. On the contrary they have not gone an blamed the excesses of foreign property developers and indeed have held their words even against their own plans. Quite simply the floor fell of the real estate market and whether this was the reason the debt implosion happened or because of a world wide financial contagion will always remain open to debate.

6. Finally the business laws and financial management of the system will become more streamlined. This will be a welcome step for the business sector. It might be a teething process but it is clear the regulation and over sight support by a sound business judicial system can only mean well for all.

Indeed there will ups and downs in the process. The first and most pressing issues will be the restructuring of the balance of the debt of Dubai World, which the bankers and lenders eagerly await into the new year. I tabulated, from the public media, maturity profile of the debt in Dubai, and the UAE and it is interesting to note that if banks were to consider around $ 12 billion to restructured from a 2 year maturity profile to a 5 year maturity profile then indeed the pressures what seem so immediate will be released. At the end of the day this breathing space is needed for the positive economic fundamentals to come into play. The service sector remains strong and indeed the tourism industry has actually performed remarkably better than expected. These are the silver linings we are missing, and while pulling out the check books and putting money into real estate may not be the first thing that comes to mind there is no doubt that not being a player in this economy is not the right thing to do.

Yes Dubai, especially, must cut back on its long term project plans and make them fit the needs that they realistically assess, and side by side phase the development from here on. They must also realize that a fair amount of the splurging of the past years was indeed wasteful and even at times questionable. This is why the return to basis is so vital at this stage to be emphasized by all and sundry.

Monday, December 21, 2009

The Dubai World debt puzzle.

I get accused these days of being a Dubai 'fan', all the more strange since I hope I have been pragmatic in my advice to both sides. Yes there is not denying that I do love the UAE, it has a great deal what is good and when it has needed improvement I have spoken out, not as a cynic but as a friend who means well. I have been a banker for a major part of my life, and have viewed banking and bankers from a close distance this past ten years.

As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.

Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.

But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.

My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.

I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.

This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.

Sunday, December 20, 2009

Around the Debt Table

One of the crucial lessons of banking is that when you lend someone say $1 million you, as a banker, have a commanding position with the borrower, but when you lend him $26 billion, as is the case of the Dubai World bankers, then frankly speaking you cannot afford to take as tough a position as you may seek. As dismal as that may sound, Dubai World, Dubai and the UAE also have a reputation they want to protect and ofcourse heal the recent acrimonious display of relations with lenders and bond holders. Armed with a new bankruptcy law, administered by some of the best western legal minds, does mean that creditors of Dubai World will have to get used to the legal formalities of such laws in the case of debt recoveries. The litmus test that will apply in such reorganization applications is that a) the company made its best efforts to convince the creditors on its reorganization plan, b) the plan provides relief to the company to reorganize itself and implement a plan that c) provides the economic possibility of a recovery better than say a fire sale would at the present.

If this test is met then the judges will be inclined to allow the company the time and the patience to meet the objectives of the plan and something the creditors may well have to swallow. Indeed, UAE entities will be penalized over the cost of new borrowing should this be the route taken.

However, my call is that when the bankers sit around the table with the company and its advisers there has to be a sense of balance that they will have to gauge. Its all fine to be publicly emotional about the whole sordid episode but we are dealing with huge sums of money and bankers cannot, and should not, let their ego's into the way. I would suspect if the plan is workable, and this is reasonably demonstrated in such a meeting then banks could agree to a restructuring of their loans in a manner which allows them interest payments and a defined structure for the future repayments of the principal amount lent.

On Dubai World's side, just because the recent legislation gives them negotiating clout does not mean they wield it. Some of the best deals break down when people get stubborn over what in the end are minor issues. Dubai World should, in my opinion look at some of the assets it holds and assure the banks that there is a plan for the sale of these assets and to satisfy them that their entire lending did not go down into a bottomless pit. Yes the land bank held by Dubai World's property arms is seriously impaired, but realistically speaking real estate may get sick from time to time but it never does really die. If the wait period is say 5 years under a restructured plan then there is a high chance that some of these impaired values may well recover, while not the to dizzy heights of two years back, but certainly well off the bottom that we saw a month back.

Dubai`World will have to also think more pragmatically and let go those plans that do not seem feasible at the moment. There is no joy in hanging onto a master plan of a project when it is highly unlikely for it to materialize in the next few years. What bankers and lenders need assurance is that the realities of the market situation are recognized and there is a willingness to cut the cloth to that size. I do know that some bankers will remain adamant about being repaid in full, perhaps buoyed by the recent news that in talks in London senior Dubai officials said repaying all the debts in full was an option. However, testing that will through the bankruptcy court is not a wise choice. I would always say that sometimes a bad settlement is better than a good court case.

I do feel that bankers are well advised to hammer out a balanced agreement and assist in the restructuring of the company. This is really the way forward that gives enough elbow room for everyone to move forward and has the best chance of being in a position that is better then where things stand today.

Wednesday, December 16, 2009

UAE Bashing- time to stop it.

Since the last week of November 2009, and after Dubai's surprise, but badly handled announcement about Dubai World, it almost became a fashion to indulge in some Dubai Bashing. So much so that the rating agencies, for whom I have scant respect, jumped in and turned the Dubai bashing sentiment into an all out assault on the UAE. Pundits who just a year ago were queuing up for invites to the latest launch of a real estate project were suddenly become experts on who felt they have to join in the assault. I am not suggesting a conspiracy theory in the media, but simply pointing out that it seems its fashionable to run down UAE and Dubai because that is what sells newspapers. I fully admit that there are problems and yes there is a need for transparency and accountability of the situation and a great deal needs to be done to bring back confidence to the system.

However, it is deeply irritating that when the good news has come out, the bond that was the subject of such concern has been paid, and most importantly Abu Dhabi and Dubai have shown that there is a supremacy of the Federal system, resulting in the $10 billion assistance from Abu Dhabi to Dubai, all this good news is not being presented in the right light. A senior correspondent of a class A European newspaper asked me, in a rather sinister way, as to what was the price Dubai will pay for this assistance. Even though whether the assistance is a loan, or indeed an asset purchase, frankly who cares? The bottom line is a crisis has been averted, and some measure of confidence has come back to the market place.

Rating agencies have found more reasons than one to continue to make it sound like a contagion. I wonder what did they know that was new now compared to a year ago? Did they not know of the debts of Dubai World? Had they not in their review process and due dilegence with banks, when granting the ratings, discussed these issues? So they say the standstill suddenly brought home the vulnerability of the situation; it highlights how weak their research was in the first place.

It is time to look ahead now. I know that the financial system has been tested in this crisis, and more importantly the country's political will as one nation has been tested and this came through with flying colors. I have been resident here for close to 30 years, and have often spoken out about matters that have needed improvement. I have not been candid and blunt because `I am not some journalist who might want sensationalism to promote my name, but someone who really believes that in the past 38 years UAE has grown to be a fabulous place to live and work. Its a safe place, with a great infrastructure and people who have been more welcoming then others. Yes there are tons of issues that need to be resolved and this is where the focus must shift.

I was asked what was the lesson learned from this crisis.

I would say if there is one thing that is not need is a system of governance, at the Federal level, whereby debts of each of the emirates and their GRI's can be monitored. I was taken aback that Dubai World, on its own was allowed to pile on such a colossal debt, much larger than Dubai's own debt. I believe that this situation should never be allowed to happen again. I am not concerned with the politics of the situation, it is in a sense, a risk even a rich nation like UAE cannot afford to take. Indeed this crisis will pass, and I say this with knowledge and confidence that there will be support from all quarters within the country to resolve the problems of Dubai World, and there will be a clear process to ensure it never happens again.

Lenders must also be made to realize that they have to carry part of the pain in this. I asked a well known journalist who has been writing about this matter every day as to why hasn't the carelessness of the bankers been questioned in this lending? I never saw one hard hitting piece on this subject, it was almost as if only the borrower was being blamed for the excesses. I believe that while the new arrangements for Dubai World have, in the longer term created the means for the repayment of the debts to take place, there is a need for bankers and bond holders to also agree to a restructured debt. This is the pain of lending and it is time that all parties understand this comes with the territory.

Sunday, December 13, 2009

The Wolves need to back off.

When the crisis of credibility and debt was unfolding in Dubai and the region, I had commented that this crisis has one benefit that it will make the UAE think like a nation and not as individual city states. Irrespective of the rumors of assets deals between Dubai and Abu Dhabi, the bottom line was, in my eyes, that an adherence to a one Nation concept was all the more important to all parties. Since September of this year this has been the message of one people and one nation. It was in this light that the announcement today of Abu Dhabi's $10 billion support for Dubai has been made. Yes it leaves one wondering why all this drama if the end the Sukuk maturing today was going to be paid in the first place. I have all along said the public relations side of this episode leaves a great to be desired and I am sure all parties have learned from it.

I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.

For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.

While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.

Friday, December 11, 2009

The Night of the Rating Agencies

The rating agencies have in rapid succession changed their position of Dubai and UAE entities, almost like in famous night of the generals from World War II, where former darlings fell from grace.. Suddenly the very story they were selling so well a year ago is being shot down by them in their supposed zest for 'caution'. In what clearly seems a case of jittery nerves Moody's has down graded three UAE based banks citing the over all financial situation over the Dubai World debt to be the reason for caution. Interestingly they say this when on November 29th, 2009, yes just about 10 days back, they said that UAE Banks rating were on review and then do not explain the reasons for the downgrade other than some prosaic general statements. I know a Moody's spokesperson will say yes the result of this review is the downgrade yesterday of EmiratesNBD, Dubai Islamic Bank and Mashraq Bank.

To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see where transcripts of the actually filed complaint appear.

Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.

Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.

Here is how is see why the panic is not being seen in balance.

1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.

I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.

I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?

Wednesday, December 9, 2009

Moody's Cheap Shot.

During my banking days I often met with rating agencies and always found them to be a rather pompous lot who 'researched' alot and often were judgmental to the point of sounding like pontificating pundits. They performed an important task for the financial markets and while generally did a decent job, but once in a while they messed up in royal style. Moody's downgrade of Dubai Electricity and Water Authority (DEWA) is based on Dubai government's "recent decision to explicitly segregate its direct obligations from those of its GRIs, following which a decision was subsequently made to pursue a debt restructuring for Dubai World'.

Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.

Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.

Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.

The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'

I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.

My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.

Tuesday, December 8, 2009

dubai and the press

Currently the financial press is littered with stories about Dubai and its current woes. In the plethora of articles from Hong Kong, to India, and the West, soothsayers are predicting the end of Dubai's glory days. Indeed the botched public relations attempt by Dubai was not only lacking elegance but also spat into the face of the financial community almost demanding a 'standstill'. Yet we live in a sad world where in moments such as these analysis that is objective are drowned in the moment of sensationalism. I am not suggesting that the urgent $26 billion debt restructuring of Dubai's world is a mirage, but I do feel that understanding defaults and quasi government debt is a little more complex then just being hyped up about it all.

But lets see the context. It is not as if Dubai is the only economy that is having to respell the word debt in one hundred different ways. Companies, public sector enterprises and indeed governments all restructure debt, sometimes by issuing new debt at other times by negotiating new terms on existing debt. So why be so surprised that Dubai has asked for some concessions and understanding? Yes admittedly it has done it with a blend of arrogance and naivety but lets move on from that and concentrate on the issues at hand. Are debt holders of Dubai World so sure that enforcement of claims will give them a better reward then cajoling the shareholder of Dubai World, which is the government itself, to put some meaning into the word 'support'.

There will be some pain through this process, and indeed for debt holders they too should know that the document they signed for the debt nowhere uses the name of the Dubai government as a guarantor, so now suggesting that there were implied guarantees is wishful thinking. It is another matter that Dubai World can ill afford to 'default' on the debt as the repercussions for Dubai and the UAE, if not the region, will be enormous. Analogies with meltdowns in the past, and references to the 'last days of Rome' are all sensationalist penmanship, and do nothing to provide merit to the discussion in hand. I have always argued that Dubai needs to create some medium term debt to replace the short term nature of its borrowings and this mismatch needs to be adjusted at the earliest.

As Dubai will tone down its 'Las Vegas on Viagra' sentiment and scale back some of its ambitious plans, there will also need to be understanding within the financial community that strangling the chicken does not always mean every one will get a meal as the wolves that tear the chicken sometimes leave nothing for anyone including themselves. The state of the financial press is such that is not even willing to see the broader picture. Dubai is a part of the UAE, and beyond the Federal Reserves held by the Central Bank, there is a huge cache of funds with Abu Dhabi entities who, as I calculate need only to give 100 days if their revenue to pay off all of Dubai's debt! Yes it is not forthcoming like a spigot turned on, because quite frankly it would be too rewarding for bankers who now claim they didn't know what and who they were lending too. If push came to shove, irrespective of the supposed political intrigue, UAE can and will act as one nation.

Some articles have claimed that there is not hope as the total public sector debt of Dubai is equivalent to its GDP. I conceded this was the case as of today indeed, but then the total debt of the US government is 90.4% of its current GDP! Why is this financial press so paranoid about the failure of the US system? In the 30 years I have been here not one bank has ever gone insolvent, and i mean a bank incorporated within the UAE. Yes I have long argued that some projects planned and being executed within Dubai would never really have a decent return on investment and some projects were about ten years before their time. But we must not forget that ten years back when a six lane highway being built between Abu Dhabi and Dubai many thought it was way over the needs of the time. Even today in this recession we see its not really an empty highway.

My point is simple, yes Dubai may not have held up to its much celebrated PR machine status, but then while these problems may well be real, there is a need for balance. Dubai government must bring to the forefront its own faces, not those of expatriates and hired guns to deal with the issues. It must also sincerely and truthfully explain what went wrong and seek substantive discussions about the way forward. The press for its part should remember that sensational stories have an expiry date which is usually one day. Look ahead, educate, explain and suggest the way forward.

Saturday, December 5, 2009

Can Dubai survive the Debt crunch?

Dubai's dream of progress and prosperity may well have been dented but its not a failed dream. In the context of the world economic crisis the crisis that Dubai faces is not as monumental as is being suggested. Dubai Worlds obligations are listed at $60 billion but these are obligations to contractors, suppliers, and indeed bond holders and debt providers. A number of contractors and consultants have only recently indicated that they would be willing to take a haircut on their receivables, some suggesting as high as a 35% reduction in exchange for a payment plan. After all, the logic goes, that these contractors benefited with robust profits from the same clients in the good days and indeed are more accommodating as the times get rough.

Over the weekend Bond holders of the $4 billion Sukuk were adamant that given they have 25% of the Sukuk holders on their side they can negotiate tough to force a payment of the bonds. Failure to have this 25% might well mean that Sukuk will be restructured, and even if an enforcement is done there are complex legal issues concerning Sukuk's which, frankly, have not been tested in a court of law before. Interestingly, if Dubai government, as the shareholder of Dubai World, did want to pay this Sukuk off, then even it runs the risk of being accused of causing losses to Sukuk holders who sold the bonds after the initial announcement of the standstill, since the standstill announcement came from Dubai government and not Dubai World itself.

Paying this Sukuk is possible and if the restructuring or extension to May 2010 is agreed by more than 75% of the holders then the current issues will subside to some extent. If not then I do feel that the resources to pay this $4 billion bond will happen even though may leave many of us wondering why the whole drama happened in the first place. I suspect that when the Dubai Government announced the 'standstill' it was felt that the market would take this news positively as the government was stepping in. This clearly backfired and the market took the news they didn't like most and made a meal of it all. If I was a bond holder and a principal shareholder being the government was initiating a new plan for repayment I would rather go with it then to rely on the assets of this particular Sukuk (in this case Nakheel's land bank which is highly deflated at the moment). But lawyers and bankers do not always make the best decisions in such moments.

However, we have to look beyond to how Dubai can survive this debt crunch.

The issue that needs to be addressed for Dubai is essentially $26 billion of debt for Dubai World, which is like a fly in the ointment at the moment. In essence the Dubai story is not over simply because a recovery in the region will bring focus back to the essential element that everyone asks. Where would you like to be based to do business in the Middle East? The answer is always going to be Dubai because of the investment it has made in the infrastructure, connectivity with the world, its airports and ports and most of all the UAE as a whole is a pretty safe place to be in. Yes its property market is dented, some believe taking as much as three years to repair itself, but its position as a financial hub, a tourist stop over and a traditional role as a commercial hub are not effected in any severe sense.

The most important thing Dubai must do is initiate a seven to ten year bond program, some of it supported by the government itself, and thus plug the gap between short term obligations and long term cash flows. To do this their handling of the current Sukuk crisis is important and will set the stage for restoring the dented confidence. Yes support can come from the Federal Government, as it has recently, or the Abu Dhabi controlled entities (as the recent $5 billion placement shows) and once goodwill is restored the ability to restructure may not be all that hard.

Interestingly, my banker friends tell me, prior to the November 25th standstill announcement discussions with bankers on an over all approach were going very well. Infact some even felt that an over all restructuring of the debt was a foregone conclusion. Indeed a bad public relations gambit backfired it all and focus on a smaller piece of the debt became paramount. Now the task ahead is to get back to the same level of confidence that was there three weeks back and build from there.

In the realm of a three year period the over all position of Dubai will be considerably better, even though we only look at the GDP as an indicator we forget that a substantial part of their GRE holdings are overseas and these can, in a global turn around, be crown jewels can can be sold off for a sizable profit. I believe the return to the enabling economy model where commerce, tourism and services will become the rock bed of the recovery that is highly possible.

Tuesday, December 1, 2009

The Dubai World Debt: A perspective from Dubai.

In moments of crisis, especially financial ones, bankers tend to seek the shortest distance to the source they think can pay them off best, and ofcourse, with the least of hassle. While I have offered my perspective on the way the Dubai World matter was handled, or mishandled, I may have come across as rather 'soft' of the bond holders and the debt holders. While some may suggest that Dubai Worlds handling of this debt saga is more akin to the way someone might be handling their credit card debts but shuffling around payments to keep every card issuer happy, they have, till yesterday, actually failed more on public relations side of the story.

For bankers, on the other hand, they have found an unlikely ally in the media who have questioned why the Dubai Government or indeed Abu Dhabi do not step in. Both miss a crucial point. If support, financial or in the shape of explicit guarantees, comes from these sources then it should be the choice of Dubai government rather than something the media or the bankers cajole them into. Yes Dubai World could be seen as a public sector company of the Government of Dubai, but this merely makes it a stakeholder, and while generally governments do prop up such companies in times of stress, this propping up is not necessarily done through guarantees, but more through restructuring and financial support as a stakeholder rather than as guarantor. Indeed banks are seeking more the goodwill of the government, but rather than asking them to help out it is being implied that they must do so.

What Dubai Government is saying is really that the distinction has to be first made of the capacity in which this help is sought. In doing so it is distancing the call of the media for some sort of government led financial support in the form of a pay up, with actually saying that the government as a stakeholder is helping in the restructuring of the companies in question. This has to be, in my opinion, a first and important step to move forward with the solution of the problems for the long term. Only after these steps are exhausted then Dubai must make an independent judgment on how to deal with the systemic risk that an non-resolution of the problem effects Dubai's other companies and the economy.

Indeed while at one end of the spectrum some may argue that the credibility of Dubai has been hurt to the point where bankers may not be so forthcoming to new commitments, the fact remains it glosses over the inadequacies of the bankers own assessment of risks during the hey days. While Dubai cannot simply argue 'why did you lend so much to one company' it still does bring home the truth that bankers assumed that lending to some entities in Dubai as akin to lending to the government. Dubai government has not told the bankers you are on your own now, but have asked them, without being too clear, that Dubai World will restructure itself and to do this it will engage with all parties concerned to come up with a plan. I believe the statement of disclosure of the debt, and the problem segment of the debt, was a huge first step in the right direction. It is this that we have to focus upon rather than the sensational elements of this story.

It is sad, that unlike the US where there are 30 year treasury bonds issued by the government, there are no long term debt instruments available in the market to match long term funding needs with the demands of a long term development program. Eventually I believe that once the restructuring is considered and banks and bondholders have assessed the merits of the situation, Dubai should consider a longer term bond program. However, how they handle the Dubai World issues will be instrumental in the way forward for this strategy to work.