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A confidence booster for Dubai

DUBAI -- Dubai World 's debt restructuring deal will boost confidence in the emirate and its banks as the creditor support gave a vote of confidence in Dubai's ability to weather its debt problems, analysts and a rating agency said on Saturday.

" Dubai World 's approval from creditors to change the terms on $24.9 billion of debt is likely to boost confidence in Dubai and its banks," according to UBS AG and Moody's Investors Service.

Dubai World said on Friday that it has reached an agreement with over 99 per cent of its creditors by value to restructure around $24.9 billion of liabilities, the government of Dubai said in a statement. Dubai World also said in a separate statement it is well positioned to close the restructuring in "the coming weeks."

"This is positive for Dubai as a whole," London-based James Sadler, a director for Middle East and Africa debt capital markets at UBS AG , said in an e-mailed response to questions. "It will allow the banks with exposures to make appropriate provisions, which should hopefully improve investor confidence in the banking sector," Sadler said.

Dubai World and its main creditor banks agreed in May to restructure $14.4 billion of bank loans and $8.9 billion of government liabilities. The company said banks would be paid $4.4 billion in five years and another $10 billion over eight years at below-market interest rates supported by assets sales.

"Any resolution is positive and we had news on Dubai Holding last week," said Abdul Kadir Hussain, Chief Executive of Mashreq Capital in Dubai. "There is progress on all of these which will deem positive for the debt position in Dubai," he added.

Dubai World controls DP World Ltd, private-equity firm Istithmar World PJSC and Economic Zones World , an operator of business parks such as the Jebel Ali Free Zone .

The United Arab Emirates' biggest banks increased provisions this year to cover losses. Dubai World , one of three state-owned holding companies, and real-estate developer Nakheel PJSC are in talks to renegotiate debt terms in the wake of global financial crisis which led to a significant drop in property prices and left companies unable to raise new funding.

Abu Dhabi Commercial Bank PJSC, or ADCB , the country's third-largest bank, said in July it had impairment allowances of Dh2 billion ($544 million) for the first half and exposure of Dh6.6 billion to Dubai World .

The bank incurred a Dh306 million loss in the period. Emirates NBD PJSC, the UAE's biggest bank, raised general provisions for bad loans by Dh668 million in the second quarter, contributing to a drop in net income. The bank reported 28 per cent drop in net profit for the first-half 2010 to Dh1.5 billion.

The ADCB shares lost 15 per cent in the past year, while the Emirates NBD tumbled 29 per cent.

The main lenders also include Royal Bank of Scotland Group Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Standard Chartered Plc and Bank of Tokyo-Mitsubishi UFJ Limited.

Foreign investors to stage comeback

"Investors now have a good precedent and insight as to the conduct of large scale corporate restructurings in the UAE, key information when making future lending decisions," Khalid Howladar, a Dubai-based senior analyst at Moody's Investors Service, wrote in response to questions. "We should see some increasing stability of pricing, which will then bring foreign investors back" to Gulf companies.

Credit-default swaps tied to Dubai government debt narrowed four basis points to 458 in London on Friday. The contracts, which pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government fail to adhere to its debt agreements, reached 627.4 at the close on February 12, the highest this year, according to CMA prices.

"There is some pent up foreign demand for the region's fixed-income product," Ahmad Alanani, a Dubai-based associate director for the Middle East and North Africa at Exotix Ltd, an investment bank specialising in illiquid assets, said in an e-mailed response to questions. "That said, it may be some while longer before foreign investors come back to Dubai as there are more restructurings lurching around the corner, namely Dubai Holding ."

Dubai Holding LLC, another of the three holding companies, is delaying repayment on part of $1.8 billion in loans due this month as state-owned companies seek to restructure liabilities. Dubai Holding Commercial Operations Group LLC, a real estate and hospitality group owned by Dubai Holding , received a second extension on repayment of a $555 million credit line, the company said on September 7. Dubai International Capital LLC, a unit of Dubai Holding , in May got a three-month extension on a $1.25 billion loan until September 30.

By Muzaffar Rizvi

© Khaleej Times 2010