We thought it would be a good idea to write up a special update from the Silk invest team to put the much awaited Dubai World/Nakheel restructuring annoucement into perspective.
The markets are on a strong rebound in Dubai today, both for equities and fixed income, following an officially published statement from the Dubai Supreme Fical Committee. We saw substantial movement in Nakheel’s 2011 Sukuk which traded up to the mid-90s – up from a low point of the low 50s only a few weeks ago. Even names not explicitly associated with the Dubai World restructuring bounced 5-10 per centage points on the announcement, which comes following a lengthy period of uncertainty. Since November 2009 the market has traded on sentiment and rumour rather than tangible facts and proposals and has kept many foreign investors away from the GCC markets.
The government’s press release this morning has clearly improved market sentiment by providing more clarity and has put some proper meat on the bones of the restructuring plan. Also very important to highlight is that there is a clear change of tone which implies that Dubai is again moving to a positon of more stregnth as the global econmy, of which Dubai is a stakeholder, is improving. While last time we wrote up a special update, the situation was very much an Abu-Dhbi bail-out, this time it is more of a strategy owned and executed by Dubai. It will allow for more people to again believe in Dubai’s prodigious future.
While Dubai’s reality was questionned by many since the original debt standstill was announced, we have maintained the view that Dubai’s remains a vibrant place to do business. As we have insited many times before, Dubai has a priviledged location at the center of gravity of the world’s economic growth. Only a couple of weeks ago did we point out that more than 65% of the world’s population lives within in a 5 hour flight radius of Dubai. In addition, it has a world-class infrastrucutre that can caputure the benefits of this privileged positioning. There is clear evidence that backs this view: Airport passenger volumes are up +20/30% over last year and Dubai’s blue chip corporates are starting to see global trade improving. As an example, DP World, the diversified ports operator noted in its FY2009 accounts that, while global trade volumes fell 8% in 2009 (the first time in history that container volumes declined!), over the past few months they benefitted from a return to growth.
We are encouraged by the Dubai government’s decision to bring its plans into the public eye. A drastic upswing in bond markets is essentially saying that it pays to be transparent. We do, however, remain cautious as volatility will remain until the sizeable debt considerations are fully dealt with. We do not need more proof that fixed income instruments issued out of Dubai have the ability to move 30 or 40 percent in a day (either up or down!). We believe that these markets will indeed emerge from the storm stronger, but there could be more volatility to endure in the meantime.
We remain stock/bond pickers in both the United Arab Emirates and the surrounding region, we have so far benefitted from investing when valuations became to cheap in our view. Our active fund management strategy which is based on diversification and our insight into the companies from a local persepective have, so far, pemitted us to make the right investment decisions in these markets.
There are some very compelling investment opportunites in the UAE that remain tremendously undervalued. When investors can again believe in Dubai, the stock price valuations of these companies are liekly to soar.A few of our favourite examples are:
Emaar Properties is a diversified real estate developer headquartered in Dubai, UAE. It mainly makes money from the development of master-planned communities, and the establishment and management of educational, healthcare and hotel facilities. You may think this sounds awfuly much like another Nakheel, but nothing could be further from the truth.In fact, this unjustified association is part of the reason why it was so cheaply valued as of recently. Emaar’s strategy is to invest in more recurring income generating assets and to diversify internationally. We are positive on Emaar due to the improving market conditions, the growth of its recurring income streams from Dubai, its geographically diversified revenue mix, and earnings momentum which is backed by strong deliveries.
National Bank of Abu Dhabiis the second-largest bank in UAE, with a solid backing as the Abu Dhabi Investment Authority holds approx 70% stake. A strong management of its lending activities together with a diverisfied wide regional strategy makes this bank very attractive amongst its peer group which is stigmatized due to the financial challenges the UAE has rcently been through.
Air Arabiahas strong potential to become a leading carrier in the MENA region given; an under-penetrated market, its operational strengths and practices and further potential upside from the success of its existing and any additional hubs/acquisitions. Air Arabia has even been able to maintain a debt-free balance sheet for the year ending 2009. The company currently operates a fleet of 21 aircrafts and has hubs in both the UAE and Morocco, it is currently setting up a third operation in Egypt. Air Arabia covers a territory that coveres an area where most of the world population lives and connects the MENA region with Europe, Eurasia and Western Asia.
In essence, the core of our investment philosophy is to prioritize investments in well managed companies that know how to use the advantage of operating out of a place with a competitive advantage and are not restrained to their own markets or segments, but actively pursue growth beyond their own borders. In fact, this is why we called our MENA equtiy fund the ‘Arab Falcons Fund’, a tribute to mobility and agility.
In other words, we believe in the region as an essentially-placed component for the next stage of the world’s globalisation and industrialisation. To this extent we are in the process of establishing a permanent presence in Dubai.
With kind regards from the Silk Invest Team
For those who would be interested in our more detailed assesment of today’s statement, we have below summarized the key points, to which we add our own conclusions:
- Both Dubai World and Nakheel are to produce new business plans which are aligned with the government’s restructuring proposal. This would indicate that negotiations are still ongoing and while this by no means marks the finishing post, there is a proper framework in place for the restructuring of Dubai’s debt.
- The Dubai government will provide up to $9.5bn in new funding over the business plan period (undetermined but we suspect 7-10 years), part-funded by loans already extended by the Abu Dhabi government. We note that this money will be part-funded from loans already extended to Dubai by Abu Dhabi, with the balanced being sourced from other local sources. More importantly, this is not a bail-out, as was the case in November when Abu Dhabi stepped in to cover the immediate debt repayment obligations of Dubai.
- To reiterate what it has already done, the government statement includes a section on “Government Actions to Date”. It mentions the tribunal framework which was announced in November to protect the various investors and creditors. It is important not to forget that no default has taken place at this stage – the Nakheel “09″ was repaid in full. What is new is that we’re seeing positive turning point in the way Dubai is communicating to its creditors and other investors. This is hardly surprising as the economic conditions both inside Dubai and externally are improving in concert with the substantial portions of debt held by powerful international institutions which are due for repayment imminently.
- The proposal is that Dubai World be effectively recapitalised. The government’s $8.9bn debt claim would be switched into equity plus an additional $1.5bn of new funds raised in the markets. For Nakheel the proposal will include a debt/equity swap, as well as $8bn in new funds. The details are still patchy, but essentially the government of Dubai will become an even more major direct shareholder in the two entities. From our perspective this is academic, given the already high association of ownership. Nevertheleess it does imply increased support.
- Finally, the statement notes that assuming bank creditors agree to restructure at “commercial rates” and trade creditors accept a piecemeal cash payment as well as tradeable security, the 2010 and 2011 Nakheel maturities will repay as they fall due.
- The statement also stresses the global recessionary environment a contributory factor in ending up at this stage.
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