December 2, 2009 11:05 pm

UK banks owed $5bn by Dubai World

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UK banks have an aggregate exposure to Dubai World of about $5bn, the Financial Times has learnt, confirming them as the biggest creditor group at the crisis-hit emirate holding company.

A week on from the emergence of Dubai’s financial turmoil, banks and their advisers are still scrambling to pin down exactly how much they are on the hook for, but last night it became clear that Royal Bank of Scotland was the most exposed of the UK banks, ahead of HSBC, Standard Chartered and Lloyds Banking Group.

Of the $40bn of total Dubai World debt, bankers close to the situation said RBS had between $1bn and $2bn (£3.3bn) of exposure, compared with about $1bn apiece for the other UK institutions. One senior banker with knowledge of the debt portfolio said Emirates National Bank of Dubai was the biggest single creditor with outstanding lending of about $3bn.

The UK banks are understood to have much of their lending focused on the still-performing parts of Dubai World, however, including DP World and Jebel Ali Free Zone. According to people close to the situation, that reduces the exposure to the $26bn of Dubai World debt that is being restructured to about $700m for RBS, and $350m for StanChart, for example – far smaller tallies than many had feared. The banks all declined to comment.

Other top 15 creditors include international banks such as BNP Paribas, Société Générale and Calyon.

The $26bn of debt that is being restructured comprises $5.5bn of syndicated debt and close to $6bn of sukuk bond debt, with all of the latter issued by Nakheel. The balance is made up of bilateral lending deals between Dubai World companies and individual lenders, on which no data is published.

The bookrunners for the $5.5bn syndicated issue, arranged in June 2008, were HSBC, ING, Lloyds, Mashreq Bank, RBS, Sumitomo Mitsui, Calyon and Tokyo Mistubishi, according to Bloomberg data. Typically, bookrunners retain 10-20 per cent of loans, syndicating the rest to third-party lenders.

Anger has been mounting in recent days, particularly among bond investors, who complain that they were duped by assurances given this year from Dubai’s rulers as to the emirate’s creditworthiness.

After an announcement by Sheikh Mohammed bin Rashid al-Maktoum on September 8 that he was “not worried” about Dubai’s debt position, international investors piled into Nakheel bonds.

Analysts said at the time that the announcement was a significant fillip to confidence in Dubai and its state-backed enterprises. “This is the first time that we are hearing from the ruler on Dubai’s debt issue. This has boosted market confidence dramatically,” said Nish Popat, the head of fixed income at ING in Dubai in a note to clients on September 9.

Although local authorities insist they were referring to the state’s sovereign obligations, investors say the emirate had long cultivated the notion of a quasi-sovereign “Dubai Inc” family that was central to the state’s development and would be supported in the event of difficulties.

“Nakheel is one of the most leveraged companies I’ve seen in my entire career,” said one hedge fund manager. “People bought it because they’d assumed there was some kind of state guarantee, which there wasn’t.”

Ashmore, the emerging markets fund manager, was a substantial buyer of Nakheel bonds this year. It increased its holdings in debt issued by the property developer by as much as 25 per cent, according to people familiar with the fund.

Other large institutional money-managers thought to be involved include Blackrock, Julius Baer and Bank of America Merrill Lynch.

The first of the Nakheel sukuks, a $3.52bn issue, is due to be redeemed on December 14. The holders of this bond are unclear but the holders are in the process of forming a group, accounting for more than a quarter of investors, to represent their interests. Ashmore and hedge fund QVT are understood to be among the leading bondholders, though neither would comment.

Additional reporting by Andrew England and Simeon Kerr

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