Moody’s:No Negative Imp For UAE Banks From Dubai World Restruc

By Brai Odion-Esene  www.imarketnews.com

WASHINGTON (MNI) – The plan to restructure the debts of struggling conglomerate Dubai World Group is unlikely to have direct negative rating implications for banks in the United Arab Emirates, Moody’s Investors Service said Thursday.

The report also warned that the restructuring may influence lending to banks in the UAE and beyond in the region and that it is “likely to translate into a much higher cost of funding.”

In a special comment assessing how the restructuring will be managed by UAE banks, the rating agency warns that sustained adverse economic conditions are continuing to pressure the country’s banking system.

March 25, the Dubai government announced a proposed framework to restructure Dubai World’s massive debt, saying that through the Dubai Financial Support Fund (DFSF), it will support these proposals with a commitment to fund up to $9.5 billion in new funding over the business plan period. The plan would be funded by $5.7 billion remaining from the loan previously made available from the Government of Abu Dhabi and from internal Dubai Government resources.

In its proposal, Dubai World said the Government of Dubai acting through the DFSF is proposing to convert $8.9 billion of debt and claims, representing 38% of the total amount of standalone debt and guarantees of Dubai World, into equity, subordinating its claims to other creditors.

“Although the plan has not yet been finalized and the lack of detail prevents us from fully assessing potential impairment losses, Moody’s initial assessment is that, by itself, banks’ exposure to the DWG is not likely to cause rating downgrades for the UAE banks,” said John Tofarides, Moody’s Analyst and author of the report.

The report warned, however, that a continuation of the weakening asset quality trend in the UAE could push 2010 profitability into negative territory for some banks. It notes that currently, of the 13 banks that Moody’s rates in the UAE, four have a negative rating outlook and another four are on review for possible downgrade — the remainder have a stable outlook.

Rating pressures are more evident among Dubai-based banks than those is more fiscally secure Abu-Dhabi, Moody’s said.

The Dubai government’s restructuring proposal provides a framework within which 100% of the principal amount due is to be repaid, but through extended tenor periods. For DWG, the proposed tenor extension will be achieved through two new debt issuances, one with a five-year maturity and the other with eight years to maturity.

Pointing out that no information regarding the potential coupons has yet been released. Moody’s said this information will be key to assessing the precise impact of the restructuring on the banks. Depending on different coupon assumptions, the agency estimates up-front losses could vary between zero to 25% of the loan values.

“Moody’s conservatively estimates that no more than AED37 billion (or US$10 billion) of UAE banks’ exposures relates to the DWG proposed restructuring,” Tofarides wrote, “Using this estimate as the basis for our maximum loss calculation, even a 25% impairment loss represents three to four months of pre-provision earnings for the rated banks, which can therefore be easily replenished.”

The impact varies considerably from bank to bank, he added, because for the most exposed banks, the maximum loss from DWG could amount to six to 12 months of pre-provision profits. This risk comes at a time when profitability is already under pressure as a result of the country’s adverse economic conditions, he said.

The report also discusses how the DWG restructuring is likely to influence bank lending to other government-related issuers in the UAE, and possibly the wider region. Moody’s believes that banks are becoming more cautious and that, in the future, they may assess government-related entities on a stand-alone basis, placing considerably less emphasis on longstanding assumptions of implied government support.

“Looking ahead, limited financial transparency is likely to translate into a much higher cost of funding for these entities, unless explicit government guarantees are provided or their level of public disclosure significantly improves,” it concluded.