Default insurance falls on debt proposal

The Dubai World debt restructuring proposal was received as good news, not just for individual companies but also for the creditworthiness of the Dubai Government. The cost of insuring against a default by Dubai fell to its lowest point since November, when the Dubai Government announced it would step in to support the conglomerate.

Credit default swaps (CDS) are insurance-like contracts that promise to cover losses on certain securities in the event of a default. Prices of those contracts to insure US$10,000 of Dubai Government debt reached $651 as recently as February 15, according to Markit, a financial information services company. The prices have fallen steadily in recent weeks but dropped sharply after yesterday's announcements, to $360.

"Over the last two or three days, there has been accumulation of Dubai-related credit protection and we saw some CDS buying ahead of the statement, now people are closing long protection positions," said Luis Costa, the director in emerging markets strategy at Citigroup. Abu Dhabi's five-year CDS also fell slightly yesterday, to $105 to insure $10,000 of debt. The proposal was viewed as positive for Dubai, largely because it provided much-needed clarity on how much money it was going to cost the Government to prop up Dubai World.

But Zafar Nazim, the senior credit analyst for the MENA region with JP Morgan, noted that there were still important questions to be answered that could affect Dubai's credit risk. For one, it was still not certain whether other Dubai entities may need to be restructured. In addition, the proposal made no mention of further support from the Abu Dhabi Government. However, some insist the risk is minimal. In a report before the proposal was released, analyst Ann Wyman, an analyst of Nomura Securities who is based in New York, said the "flush state of UAE finances at the federal level means the risk of default is limited".

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