Posted by Miles Johnson on Dec 14 15:34.
Ratings agencies Standard & Poor’s and Fitch have issued responses to Dubai’s surprise repayment of the now infamous $4.1bn Nakheel sukuk.
And just in case the emirate was labouring under any misconceptions, both make it clear that the $10bn chucked its way by Abu Dhabi will have no impact on the ratings of any Dubai Government-Related Entities (GREs).
Standard & Poor’s Ratings Services considers this announcement as a step towards rebuilding confidence in Dubai’s policy-making environment. In particular, we believe the intention to strengthen the laws governing the Dubai World restructuring is an opportunity for the Dubai government to demonstrate the workings of its legal system in dealing with such events. Moreover, we view the intervention of Abu Dhabi as an indication that it stands ready to safeguard the stability of the UAE economy and financial system.
However, we believe uncertainty remains as to the Dubai government’s general ability and willingness to provide timely extraordinary support to its government-related entities (GREs), as well as the transparency and predictability of such support. The remaining financial obligations of Dubai World and Nakheel, amounting to around $22 billion, remain the subject of a restructuring. Therefore, we will continue to monitor the situation closely, and any ratings action we take on Dubai-based GREs based on the question of potential government support will be grounded in clear and publicly stated policy that is supported by appropriate laws and/or instruments.
The subtext here is clear. Dubai cannot hold its fate in its own hands. As such, nothing is certain about its credit risk.
Investors will continue to make wagers on Abu Dhabi’s continuing support for its financially challenged cousin. But the grounds for this argument – that the damage to the richer Emirates’ reputation if Dubai were default serves as a implicit guarantee – is hard to quantify.
Judging from the opacity(不透明)of the bailout and Nakheel repayment, both emirates will need to work harder to restore confidence in the region.
Legal and procedural transparency is key for international investors and rating agencies alike, as is a move towards international bankruptcy standards.
Dubai has said it will begin a “comprehensive reorganisation law”, a boon to investors exasperated by the emirate’s primitive bankruptcy laws.
This would, as Fitch note, make doing business in the region less of a hair-raising prospect for creditors.
While questions remain on how this change will practically affect creditors, this action is clearly aimed at facilitating easier corporate restructuring. In turn, this has the obvious ancillary benefit of making it simpler for future corporate debt obligations to be addressed through court-based restructurings, rather than through a sovereign bail-out, reducing the pressure on Dubai to continue offering financial support to corporate entities, and on Abu Dhabi to accede to further financial pressures in the neighbouring emirate.
But Monday’s statement provides little clarity on how these reforms will work in practice. Fitch expect the changes to be based on the code currently employed by the Dubai International Finance Centre, Dubai’ financial free zone. S&P also welcome the move, but argue that the remaining uncertainty overpowers any positive impact this could have on the ratings of Dubai-related companies.
Abu Dhabi’s surprise largesse will not erase the disasters of the last month – throwing money at problems doesn’t always make things better. At best the bailout is a palliative(緩和的) for the emirate’s ills; at worst a further example of a region that views itself above the norms of international finance.
Until the workings of the region’s financial system become clearer, the stink of Nakheel incident will linger like a stagnant(停滯的) water in a 75 km Arabian canal.
Related links:
Statement From Sheikh Ahmad Bin Saeed Al Maktoum – FT Alphaville
Abu Dhabi steps in to bail out Dubai – FT
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