Dubai World offers 60%...Why is is a buying opportunity

No Love Lost Between Dubai World, Bankers on Deal Talk
Published: Monday, 15 Feb 2010
If Dubai was floating a trial balloon with a rumored debt offer proposing a scant 60 cents on the dollar, it may have to think again.

Stock markets tumbled and bankers turned glum following a report that Dubai World was mulling offering creditors two options, neither one reassuring to investors already spooked by Dubai's debt debacle.

According to the report, Dubai World will offer creditors either 60 percent repayment over seven years and a government guarantee, or full repayment with a debt for equity swap for property assets of Nakheel and no guarantee.

Neither option is palatable to bankers and the government was quick to distance itself from the report by Dow Jones.
"If anything is a surprise, it's in the figures," said a banker at a large international bank. "I thought they would have proposed a little better than 60 percent. This doesn't look promising."

Aside from the steep 40 percent haircut, creditors are unlikely to welcome getting assets in Nakheel, the developer behind man-made islands shaped like palms and a map of the world.

Nakheel had net tangible assets of 73.7 billion UAE dirhams ($20.07 billion) as of June 30, with properties under construction, including land, valued at 112.8 billion dirhams, according to Mac Capital Advisors.

"This gives an indication of what they're thinking — they're considering some sort of discount," said one Gulf-based banker who asked not to be identified. "It implies the government could have senior position, which the banks may not want to accept. And if it (the deal) doesn't guarantee interest payments, it's not a great deal for the banks."

The government reiterated last week that financial aid to Dubai World, through the Dubai Financial Support Fund (DFSF), was being delivered on commercial terms.

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In Denial

Dubai World rocked global markets in November with plans to request a delay on repaying $26 billion in debt linked to its main property units Nakheel and Limitless World. It staved off default on a $4.1 billion Islamic bond linked to Nakheel, after a last minute bailout from Abu Dhabi.

Criticized for its lack of transparency, Dubai said on Sunday it had made no formal restructuring proposals and nothing was expected until March or April.

"Although today's restructuring rumors have been denied by Dubai authorities, the risk of a deep haircut and extension of maturities still remains high — given the combined solvency and liquidity problems facing Dubai World and a number of its subsidiaries, including Nakheel," said Goldman Sachs in a note to clients.

Dubai's main index fell to its lowest level in three weeks on Sunday in response to the news report, closing 3.5 percent lower.

"The stock market's reaction (today) reflects how bankers have interpreted this," said a senior Abu Dhabi based banker, adding that no official announcement has been made to the bank's representatives at creditor meetings with Dubai World.

The company is negotiating with an informal bank coordinating committee and has yet to make a formal proposal on how it plans to repay some $22 billion in debt.

The conglomerate is relying on the goodwill — and self-interest — of creditors to patiently wait for such details on how it plans to meet its obligations.

"It's a double-edged sword — how much can Dubai World push down on UAE banks that hold this debt?" said Ali Khan, managing director and head of brokerage at Arqaam Capital. "This will have wider implications, given the bank sector's weight on the stock market."

On Friday, the cost of insuring Dubai's debt soared to 2-1/2 month highs and bond yields rose as growing uncertainty over the fate of the debt-laden conglomerate World sent investors scrambling to hedge their exposure.

"I think it's for real, just gently priming the market," said an Asia-based banker at a major international bank. "Tomorrow will be very interesting, when London and the U.S. are in."
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They said it was a buying opportunity, remember? They said the same thing about Japan in 1991. They said techs were a buy in 2001 a year after the bubble. They said the same thing about housing in 2006 a year after the bubble. They said the same thing about sub prime loans in 2007. They were saying that even though real estate prices were in full collapse in 2006 and 2007. Cramer touted the low in housing in the summer of 2007. The Fed Chairman told us the crisis was contained in 2007 and would not spread to the other areas of the economy. They said the same thing about Bear Sterns and Citi bank in 2008.

What is being touted as a buying opportunity now?...THE COMMODITIES. The banks are knee deep in inflated assets and THE DEBT AND ASSETS NEED TO BE DEFLATED. It is all part of worldwide deleveraging and it going to take years. After a bubble cheap means nothing because debt needs to be unwound. Please review the charts below and see if you think the commdities are a buy. Please notice the parabolic spike at the end of each bubble and what happens afterwords.


Historical Nikkei,an example of deleveraging from an asset and debt bubble



INTC stock bubbled with the techs in 2000



KBH KB Homes bubbled with the housing bubble in 2005. It is now 5 years off of the top and still falling. In 2007 Ctamer said the housing stocks were bottoming




Example of current bubbles that have bounce from first hit, They are all commodity related. The commodities bubbled in 2008 and were heavily touted by the experts and heavily bought by the public. The theme is the dollar in going down and inflation is coming. That makes sense to the public, but as you see from the above examples once the sector bubbles it takes years to unwind.

Oil index bubbled in 2008 and has rallied from its first sell off. Oils continue to be highly recommended.



EWZ Brazil bubbled with the commodities I hear recommended now by the experts




FCX Freeport Copper and Gold Bubbled in 2008 with the commodities




FXI China has bubbled and bounced



Silver




IYR Commercial real estate bubbled with the top of the consumer bubble in 2007




EEM Emerging Markets still being touted have bubbled



The CRB Commodities



Gold Near the top is masking the decline of the other commodities





When a sector bubbles, the public gets in on the last year of the run. The public is ALLOWED to make money. They believe the story because they got to make money. The thing the public does not know is that after the bubble the game is over. The leverage that created that bubble must unwind. The commodities and the debt bubble that went with it have to unwind. That means the whole gain that was made during the bubble will evaporate and then some. All the while the experts will be touting them as buying opportunties so they can liquidate the assets of their clients,the banks and insiders, to the public. That is what is happening now with the RECOVERY STORY.

Dubai is just another example of this process. The bankers are balking at 60% but before it is over 60% will look good and they know it. Why are they balking at 60%? They don't want the truth to come out now because other assets on their books will have to be devalued. They want to keep up the illusion that it will be worked out and they need time. This annoucement puts them in a bad spot because they have many more assest that will be hurt by this kind of news. A buying opportunity? That's the message the banks want to put out but this news outs that message.

The US recovery story is just as big a scam as Dubai world and is being told to cover up assests that are highly leveraged and overvalued. The US banks need that story just as the European and Mideastern banks need to tell the public that Dubai is a buying opportunity so they can sell the assets to the public and get them off of their books.

In the US overly leveraged real estate is the problem. In the world, the commodities markets are leveraged to the hilt. The reason the experts are telling the story of worldwide growth, the lower dollar and strong commodities is to hold those markets together just like the banks wanted Dubai to keep the story together. It looks like to me that story is coming undone. Of course, they can prolong that story by bailouts and renegotiations or maybe tomarrow Dubai will say they make it 85% we were just kidding, or they can deny the story completely.

In the end, the assets will be valued on their true value without leverage. The banks know it, the experts know it, the governments know it and now you know it.