Global Arab Network | Dubai World Restructuring – No negative rating for United Arab Emirates banks

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Dubai World Restructuring – No negative rating for United Arab Emirates banks

Global Arab Network - - Mohammed Almasri

Thursday, 08 April 2010 19:01

The proposed framework for the restructuring of Dubai World Group (DWG) is unlikely to have direct negative rating implications for banks in the United Arab Emirates (UAE), says Moody's Investors Service in a new Special Comment. However, the rating agency cautions that the sustained adverse economic conditions are continuing to pressure the country's banking system.

On 25 March 2010, the Dubai government announced a proposed framework for the restructuring of the debt of its investment vehicle Dubai World Group (DWG), thereby putting an end to the uncertainty of the potential restructuring scenarios and their implications for the Dubai economy."Although the plan has not yet been finalised and the lack of detail prevents us from fully assessing potential impairment losses, Moody's initial assessment is that, by itself, banks' exposure to the DWG is not likely to cause rating downgrades for the UAE banks," says John Tofarides, a Moody's Analyst and author of the report.

The rating agency cautions however that a continuation of the weakening asset quality trend in the UAE could push 2010 profitability into negative territory for some banks. Currently, of the 13 banks that Moody's rates in the UAE, four have a negative rating outlook and another four are on review for possible downgrade (the remainder have a stable outlook). Rating pressures are more evident among Dubai-based banks than among their Abu-Dhabi-based peers.

The restructuring proposal provides a framework within which 100% of the principal amount due is to be repaid, but through extended tenor periods. For DWG, the proposed tenor extension will be achieved through two new debt issuances, one with a five-year maturity and the other with eight years to maturity. In its new report, entitled "Proposed Restructuring of Dubai World Group: Impact to be Manageable for Rated UAE Banks", the rating agency cautions that no information regarding the potential coupons has yet been released. Moody's says that this information will be key to assessing the precise impact of the restructuring on the banks. Depending on different coupon assumptions, Moody's estimates that up-front losses could vary between zero to 25% of the loan values.

"Moody's conservatively estimates that no more than AED37 billion (or US$10 billion) of UAE banks' exposures relates to the DWG proposed restructuring. Using this estimate as the basis for our maximum loss calculation, even a 25% impairment loss represents three to four months of pre-provision earnings for the rated banks, which can therefore be easily replenished. However, the impact varies considerably from bank to bank. For the most exposed banks, the maximum loss from DWG could amount to 6 to 12 months of pre-provision profits. We also note that this risk comes at a time when profitability is already under pressure as a result of the country's adverse economic conditions," Mr Tofarides explains.

Moody's report also discusses how the DWG restructuring is likely to influence bank lending to other government-related issuers in the UAE, and possibly the wider region. Moody's believes that banks are becoming more cautious and that, in the future, they may assess government-related entities on a stand-alone basis, placing considerably less emphasis on longstanding assumptions of implied government support. "Looking ahead, limited financial transparency is likely to translate into a much higher cost of funding for these entities, unless explicit government guarantees are provided or their level of public disclosure significantly improves," Mr. Tofarides concludes.

Global Arab Network

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