Big UAE banks to benefit from $14.6bn Dubai World debt restructuring

The UAE financial system, and especially Emirates NBD, will benefit, says the ratings agency Moody’s Investor Services.

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The UAE’s big banks are set to receive a boost from the restructuring of $14.6 billion of Dubai World debt.

The UAE financial system, and especially Emirates NBD, will benefit, says the ratings agency Moody’s Investor Services. It said that the deal hammered out last month between the investment conglomerate and more than 100 creditors is “credit positive” for the banks, and would reduce total non-performing loans (NPL) by 2.7 percentage points. The full extent of the reduction will be clear once banks report their figures for 2014, Moody’s said.

But it looks as though Emirates NBD, the biggest bank by market share and also the biggest UAE creditor to Dubai World, is an immediate winner. The bank – 56 per cent owned by the government’s flagship investment institution Investment Corporation of Dubai – has been able to reclassify its $2.3bn exposure to Dubai World from “impaired” to “performing”, which will help the bank report a dramatically improved level of bad debts, down from 15.1 per cent to 8.3 per cent in 2014.

Dubai World, which sparked the 2009 financial crisis in the emirate with its surprise request for a “standstill” on debt repayments, reached a deal with creditors to repay some debts ahead of maturity, in return for delayed repayment terms on other debts.

It also agreed to pay higher interest on some $11.7bn of debts and provide collateral in the form of shares in DP World, the global ports operator, 80 per cent owned by Dubai World.

This deal replaced an earlier restructuring which, according to Moody’s, “presented substantial tail risk” for lenders and under which some creditors still classed their loans as “impaired”.

“The January 2015 agreement addresses the key weaknesses of the first restructuring,” said Moody’s.

Khalid Howladar, Moody’s senior credit officer, said: “Dubai World, together with various other distressed Dubai government-related entities, contributed around 30 per cent to the system-wide non-performing loan peak of 10.5 per cent in 2011, and highlighted the concentration risks endemic among the GCC banks.

“Although the recent oil price collapse has increased the downside risks of the regional operating environment for the UAE’s local banks, this more sustainable resolution of the GCC’s largest legacy default reduces one of the key uncertainties facing the UAE banking system,” he adds.

Moody’s added, however, that problem loans could begin to rise again towards the end of 2015 as the effects of low oil prices worked through the UAE economy. The ratings agency also warned that Dubai Holding, the other big government-related enterprise badly hit by the 2009 crisis, would continue to be regarded as a problem loan.

The conglomerate restructured some $10bn of debt last year after long-running negotiations with creditors, but, according to Moody’s, the terms of the restructuring are “non-commercial”.

Moody’s said: “Since 2011, the high government spending [particularly in Abu Dhabi] and continued recovery in core, private sector economic sectors [particularly in Dubai], have driven an overall recovery in the UAE’s operating environment.”

fkane@thenational.ae

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