EFTA00767161.pdf

From: Rosa M da Silva To: [email protected] <[email protected]> Subject: FW: Cutting through the haze : Further thoughts on Dubai Inc Date: Mon, 30 Nov 2009 14:02:14 +0000 Attachments: JPM_Cutting_through_the_haze_2009-11-30_349692.pdf Inline-Images: ATT00001.gif; ATT00002.gif From: Nick O'Donohoe Sent: Monday, November 30, 2009 8:56 AM To: Jes Staley Cc: Rosa M da Silva Subject: FW: Cutting through the haze : Further thoughts on Dubai Inc This one on the credit/economic issues... From: Zafar Nazim [mailto Sent: Monday, November 30, 2009 7:17 AM To: Nick O'Donohoe Subject: Cutting through the haze : Further thoughts on Dubai Inc J.P.Morgan Emerging Markets Credit Research Cutting through the haze: Further thoughts on Dubai Inc Click here for the full Note and disclaimers. • Dubai's decision to call for a standstill on the debt of its largest state owned entity, Dubai World and its property subsidiary Nalcheel, will have long-term ramifications for the Emirate and for the region. In particular, the move appears to challenge the widely-held assumption that Federal resources would be used to support state-owned entities in Dubai, consistent with a broader expectation of government support for quasi-sovereigns across the region. While the move is arguably a rational response to reduce an unsustainable debt burden in Dubai, especially in the real estate sector, the decision-making process has been opaque, and going forward we believe it will be key to ensure the restructuring is handled in a transparent manner to avoid further damage to Dubai's financial reputation. • The situation remains fluid with few formal announcements. There has been speculation on newswires that Federal government guarantees could yet be made available to facilitate restructurings. We do not rule out such action, but believe it is far more likely that Federal resources will be used to insulate local entities — especially banks — from the fallout of the EFTA00767161  restructurings. We believe it is highly unlikely that payment will be made on Nakheel 09s as due and even if a voluntary restructuring could be agreed before the December 28th grace period, the reputational damage to Dubai's credit profile is already significant. We expect Abu Dhabi will remain a provider of financial support to Dubai, on a `selective basis' but, consistent with precedents set in recent restructurings elsewhere, burden sharing will be required with creditors in those entities where leverage is excessive. • Longer term the restructuring of Dubai World should improve the viability of Dubai's financial position (and ease contingent liabilities of Abu Dhabi) although near-term we expect market access to be severely constrained for all Dubai and many Abu-Dhabi corporates (we estimate US$23bn of maturities in 2010 for UAE entities, of which US$l6bn is Dubai). The extent of sovereign support for all regional entities is currently being re-evaluated, and this is likely to be reflected in higher spreads and lower ratings across quasi-sovereigns in the Middle East, especially in Dubai. • The sell-off in Middle Eastern credits has been severe, as the market was caught unprepared; benchmark Dubai credits widened by up to 1,300bps, while Nakheel 09s fell by over 80 points in 48 hours. While we caution that we could test new lows as regional markets reopen, we do not expect a blanket restructuring of all Dubai state-owned credits, and as the dust settles we expect to see far greater discrimination. Most value impairment is expected in Nakheel, and certain `Dubai Inc' credits such as Dubai Holding are likely to remain under pressure. At the same time, DP World has already clarified that it is not included in the restructuring, and other entities that we believe have a viable debt profile include JAFZA and DEWA. The UAE banking sector, especially Dubai based banks, is likely to remain volatile, but we expect UAE authorities to support liquidity near-term, and provide further solvency support if needed. Zafar Nazim Victoria Miles Brahim Raz Yallah If you no longer wish to receive these e-nubs then click hem to unsubscribe www.morganmarkets.com Analyst certification: I certify that: (1) all of the views expressed in this research accurately reflect my personal views about any and all of the subject securities or issuers; and (2) no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed herein. Important disclosures, including price charts, related to the companies recommended in this report are available in the PDF attachment, through the search function on J.P. Morgan's website https://mm.jpinorgan.com/disclosureskompany, or by calling this toll free number (1-800-477-0406). J.P. Morgan Securities Ltd. 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