Tuesday, 25 September 2018

Dubai refis beat fatigue

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Dubai’s attempts to refinance a number of debt obligations in a depressed market were always going to be a difficult battle in 2009, write David French and Solomon Teague.

While the Western world struggled to overcome the credit issues brought on by the collapse of confidence in US sub-prime mortgages, the first few months of 2008 were a golden age for the countries of the GCC. International banks, watching their profits dry up at home, flocked to the region to do business.

Many GCC companies took advantage of the money being offered; none with more vigour than those based in Dubai. At one stage, during the month of July, five state-backed Dubai corporates launched loans into the market, on top of existing supply. Bankers were soon quipping that the market was suffering from "Dubai fatigue", given the amount of cash the Emirate was borrowing.

However, the collapse of Lehman Brothers and the sharp slump in oil prices proved that a decoupling from outside events was a myth and even the GCC couldn't escape the worst global financial crisis since the Great Depression. As 2008 drew to a close, international loan markets became moribund, and anyone who hadn't completed their deal by the end of September found themselves locked out.

This meant that those Dubai firms that had loans maturing in the final weeks of the year found themselves with a stark choice: pay up or default. Access to funds was just not possible, even for companies looking to roll over facilities. DIFC Investments found this out when it looked to refinance a US$500m one-year deal maturing in December. It launched a US$350m one-year loan on November 21, offering a 400bp margin, through Goldman Sachs. However, within 72 hours of the deal becoming public knowledge, it was pulled for being too expensive and the borrower paid the loan off.

The experience of DIFC Investments was just a precursor of what was to come. Dubai had US$15bn of obligations due during 2009, according to estimates from Moody's, and banks were increasingly nervous of its ability to meet them. This hesitance compounded the restricted access to the loan market for all borrowers to create a situation where many bankers moved away from thinking of if a Dubai default was coming; to a case of when it would come.

The first test would come soon for Dubai, with one of the biggest obligations due in the middle of February.

Borse Dubai's original one-year deal, signed in March 2008, had been a resounding success. The US$3.78 facility, raised to fund its US$4.9bn purchase of Nordic stock exchange OMX and its subsequent tie-ups with the London Stock Exchange and Nasdaq, attracted massive interest from banks. This time though, things would be different.

Timing was the key problem. Borse Dubai and its lead, HSBC, first approached banks for the deal in September but got squeezed out by the Lehman Brothers fallout and so returned in November. Even in a good year, November and December are not good months to approach banks for deals of this size: as the year draws to a close, activity traditionally tails off as credit committees wait until January to assess the tone of the market as activity picks up again.

Yet 2008 had tailed off rapidly and expectations for the start of 2009 were very gloomy. Many potential participants were themselves going through a period of reflection and strategic realignment, so obtaining commitments for the region's first major deal of the year presented particular problems. Credit committees were reappraising their commitment to Dubai at a time when, sitting in London or New York, they must have been influenced by the constant stream of negative media coverage from Dubai specifically and the Middle East generally.

HSBC's task had been helped by sterling's depreciation against the dollar in late 2008, meaning the £796m portion was now much less to refinance. However, this was the only comfort for Borse Dubai. Attempts to attract a top group of banks faltered, with Barclays, Citigroup and Goldman Sachs, who were at the top on the original facility, not renewing their commitments. Negotiations dragged on and, with time running out, HSBC eventually launched the deal to the rest of the market without this top group in place on January 12.

Even before the deal was launched, most bankers were sceptical that it would raise the full US$2.5bn. This was soon obvious from sentiment in the market and even in the hours before the deal was due to sign, questions were still being asked about where the shortfall would come from.

On February 18, Borse Dubai signed the loan agreement at the full US$2.5bn amount, to the shock of the market. Having raised US$1.2bn in syndication, the deal was saved by Borse Dubai's parent, the Investment Corporation of Dubai (ICD). As well as providing a promised US$1bn equity portion to meet the original US$3.78bn figure, it also made up the balance of the facility by channelling funds through Emirates NBD and Dubai Islamic Bank (DIB) from its own US$6bn syndicated facility from November.

The deal, which was for one-year and had a one-year extension at the discretion of the borrower, saw nine conventional banks join in syndication: Emirates NBD, National Bank of Abu Dhabi (NBAD), Bank of Tokyo-Mitsubishi UFJ, Bank of Baroda, ING, Intesa Sanpaolo, Industrial & Commercial Bank of China (ICBC), SEB and Union National Bank. DIB was the sole bank to provide the Islamic tranche.

The facility paid a margin of 325bp, with tickets and fees of US$100m and 105bp for MLAs; US$75m and 90bp for senior lead arrangers; US$50m and 70bp for lead arrangers, and US$30m and 55bp for arrangers. Those banks that agree to the one-year extension receive an additional 75bp fee.

Bankers on the deal felt that raising more than US$1bn from the market was an impressive achievement, particularly as the extension option effectively turned the loan into a two-year facility. They also insisted that it had always been clear there was little chance of meeting such a large financing requirement in the bank market alone, given the circumstances, and the government was always expected to make up the shortfall. The fact that it did underlined the exchange's strategic importance to the Emirate and, more importantly, showed that Dubai had the liquidity available to support its economy and meet its obligations.

News of the successful close of the facility was greeted with relief from the wider market, with Dubai's stock markets rallying and its five-year CDS easing 50bp to settle at 950bp by the end of the week. Yet Dubai's one-year CDS remained at 1,100bp, suggesting that the market saw a risk of default in the short-term.

The trouble was that while Borse Dubai had managed to complete its refinancing, the underlying concerns over the Dubai economy were still present in the minds of bankers. The high CDS prices reflected the continued fear that Dubai was unable to manage its debt obligations, which still ran at about US$11bn for 2009 – even after Borse Dubai was completed.

Banks, which were still reluctant to part with what liquidity they had access to, were unwilling to risk putting their money into the Emirate when a default at some point in the near future was considered a distinct possibility. To make a comparison, the original Borse Dubai deal, launched at a time of confidence that the GCC could escape the worst of the economic crisis affecting the Western world, romped home, attracting more than US$3bn during syndication. The refinancing, undertaken when this perception had been shattered, struggled to pull in US$1.2bn.

Dubai continued to insist throughout the Borse Dubai refinancing that it would be able to meet all its obligations without triggering a default. However, most financiers agreed that Dubai, despite the comments from high-ranking officials, was swimming against the tide. The lack of support from the international banking community shown during the Borse Dubai deal was a sign that Dubai might have to plug shortfalls in all its refinancings. Most bankers also agreed that Dubai didn't have the resources to do this and it would have to turn to its big brother, Abu Dhabi, to help it with a bailout. The questions of if and when, which had been circling since October, were soon answered.

On February 23, Dubai announced plans for a US$20bn bond programme, of which the UAE Central Bank would subscribe to the initial US$10bn tranche of five-year unsecured paper with a fixed 4% coupon. While the use of the term "bailout" was distinctly absent from the government statement, even it went as far as admitting that the programme "will secure the necessary funding for Dubai to meet its financial obligations".

The news saw the Dubai Financial Market rally in its biggest one-day jump since mid-November. Spreads on Dubai bonds also tightened significantly and the five-year CDS, which declined 50bp after the refinancing closed, dropped by more than 20% to finish the day around the 700bp mark.

The news of the bond issue was a significant boost for Dubai sentiment, with bankers expecting that the US$20bn would be enough to cover the Emirate's obligations through 2009 into 2010. For the next refinancing on Dubai's radar, this improvement was tangible.

The US$2bn ijara issue that Dubai Electricity and Water Authority (DEWA) launched in February 2008 attracted good support, closing slightly up at US$2.2bn a month later. However, by the time banks were approached about a refinancing in January, it must have known that it wouldn't be smooth sailing this time.

It wasn't helped by the fact that the month before, on December 18, Fitch Ratings had responded to its deteriorating view of the Dubai economy by downgrading two of its corporates: Dubai Holding Commercial Operations Group (DHCOG) and DEWA. With the other two main rating agencies, Moody's and Standard & Poor's, also having negative outlooks for DEWA, it wasn't the best time to be approaching the market.

Such reservations were voiced by the CEO, Saeed Mohammed Al Tayer, on February 17, when he admitted that the loan amount could be scaled back because its requirements had been changed by the economic conditions. What wasn't helping was the underwhelming response to Borse Dubai, with bankers predicting that the DEWA facility might also only reach about US$1.2bn. However, by this point the Dubai government had taken much of the responsibility away from the lead banks and was self-arranging the deal to try and get it done.

The announcement of the sovereign bond programme certainly helped DEWA's cause. Suddenly, bankers on the deal were talking about rolling over the full US$2.2bn, instead of scraping up US$1.5bn or US$1.7bn. With the immediate worries of a default pushed back, bankers started to look more at the fundamentals of the borrower, with its constant revenue stream being a good selling point in a recessionary environment. DEWA was also working hard, with its adaptability in the difficult market being praised by bankers signing up.

A senior group of banks filed their commitments by early March, by which time the deal had been opened up to local institutions. It was extremely well received by these banks and by the middle of the month a fully subscribed deal was the predominant rumour in the market.

The deal was signed on April 7 with 18 banks in total on board. Things had shifted around slightly at the top, with DIB and Standard Chartered joined by Emirates NBD and NBAD. The latter two had taken the place of RBS, which had opted for a smaller role on the deal. The ijara facility had also added a conventional tranche to open the liquidity pool to all banks.

On the conventional tranche, which made up US$726m of the total, were Emirates NBD and NBAD (both MLAs), Lloyds TSB Bank (lead arranger) and Bank of Baroda, Commercial Bank of Dubai, State Bank of India and WestLB (all arrangers). On the US$1.474bn Islamic portion were Al Hilal Bank, DIB, Samba Financial Group and Standard Chartered (all MLAs), Badr al-Islami, Calyon, Citigroup, Emirates Islamic Bank, Intesa Sanpaolo and RBS (all lead arrangers), and Dubai Bank (arranger).

Both the size and currency of commitments varied across the board, with banks asked to allocate what they were comfortable with. This led to dirhams, dollars and euros all being included in the final deal. The margin had also shifted with the sentiment, with banks signing on at 300bp. This was down on both the 400bp rumoured at the beginning and the 350bp mooted through most of the negotiations.

At the same time as the DEWA deal was happening, a smaller facility was also trying to attract commitments. Dubai Civil Aviation Authority (DCAA) was a much smaller task than DEWA: a US$1bn ijara issue signed in May 2006 by nine banks to fund the development and expansion of Dubai International Airport. However, it posed its own challenges as well.

News of talks to refinance the deal surfaced in early March, meaning that it benefited from the fillip that the bond programme gave. However, the original club deal was funded by eight international banks and one local, lead manager DIB. It was clear this time around, with foreign banks limiting their commitments to Dubai and focusing on the DEWA deal, that DCAA would have to draw capital from the region.

With the liquidity constraints hampering regional institutions, despite the best intentions of governments to bolster confidence and capital in various ways, this was going to be a difficult task. By the time the Dubai government announced that the refinancing had closed on April 6, US$635m had been committed by eight institutions; the majority (US$463m) in dirhams, with other contributions in dollars and euros. The margin was 300bp, with the facility to be repaid in three semi-annual payments beginning in April 2010.

Along with DIB, the seven who joined were Emirates NBD, ICBC, Noor Islamic Bank and West LB as MLAs and bookrunners and Commercial Bank of Dubai, Mashreqbank and Union National Bank. The remaining US$365m came directly from the Dubai government. It was the second time in two months that the Emirate had been forced to intervene and supplement a refinancing.

The DCAA transaction showed that the sovereign bond programme would not be the answer to all Dubai's refinancing problems. While the immediate threat of defaults has diminished, there are still underlying concerns over Dubai's ability to manage all its obligations. The continuing saga over construction firms not being paid by state-backed developers and the restructuring of Nakheel's US$3.5bn sukuk issue, due in December, are just two of the more prominent signs that Dubai is still stretched.

Existing problems that were masked by the more immediate default threat at the beginning of the year have also returned to prominence. The local liquidity issues, such as the shortage of dollars and the creditworthiness of banks, are still a problem and will continue to hamper attempts to tap local capital.

The impact of Dubai fatigue also hangs over the Emirate. With a number of refinancings and a reduced number of banks, institutions will pick and choose which corporates they back. This was a problem at the height of the loan boom in 2008, with big-name borrowers, such as ICD, squeezing out the less well-known names. Such a scenario has already manifested itself, with DEWA attracting the attention of the international banks and DCAA left to try and drum up support from local shops. This will continue for the rest of the year, meaning Dubai will have to be careful how it structures its pipeline.

Ultimately, while the situation has improved slightly, Dubai has not made it through the storm. It will find itself needing to support the refinancing efforts of its corporates for some time yet; whether it is through logistical support, as on the DEWA deal, or through more direct, financial action, as it did with Borse Dubai and DCAA.

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