Dubai debt risk widens on Abu Dhabi bank injection

DUBAI, Feb 5 (Reuters) - The cost of insuring Dubai’s debt with credit default swaps increased on Thursday after an Abu Dhabi plan to inject 16 billion dirhams ($4.36 billion) into five of its banks further shook confidence in Dubai, bankers said.

The government of Gulf oil exporter Abu Dhabi announced on Wednesday it would lend cash to banks in the emirate, including National Bank of Abu Dhabi NBAD.AD, via Tier 1 capital notes to bolster confidence as loan defaults mount. [ID:nL4751797]

The move left markets wondering whether similar steps would take place in Dubai, where banks are struggling as the emirate’s once-booming property sector faces a sharp correction that has prompted developers to scale back expansion and cut jobs.

Five-year Dubai sovereign credit default swaps (CDS) are traded at 775-825 basis points (bps), about 75 bps higher than Wednesday, two bankers in Dubai and Abu Dhabi said.

CDS contracts protecting debt of government-linked Dubai companies also widened by about 50 bps for Dubai World and about 100 bps for Emirates NBD ENBD.DU, the bankers said.

“This is because of the Abu Dhabi move. The perception that Dubai could default on its loans is increasing in the market,” said one banker in Dubai.

Buying CDS, which is similar to buying insurance, on Abu Dhabi sovereign debt also rose by 20 bps on Thursday to about 305 bps -- a level similar to those in Saudi Arabia and Qatar, they said.

During a six-year building boom supported by high oil prices in the Gulf, Dubai borrowed heavily to finance often lavish real estate projects, including the world’s tallest tower and islands in the shape of palm fronds and the world map.

A property price correction triggered by the global financial crisis has already witnessed Dubai residential real estate prices fall by at least a quarter as speculators exit the market, according to estimates of some investment banks.

Facing the risk of greater mortgage and consumer loan defaults, banks are taking massive provisions for bad loans and writing down investment losses.

In November, Mohamed Alabbar, chairman of the Gulf emirate’s top economic body, said Dubai’s sovereign debt stood at $10 billion while debts of state-affiliated firms amounted to $70 billion.

Moody's Investors Service said on Monday it was considering downgrading its debt ratings of six Dubai companies, including Emaar Properties EMAR.DU and DP World DPW.DI due to the escalating global financial crisis.

Meanwhile, several Dubai-based contractors told Reuters this week they are owed millions of dirhams by state-linked developers, with some saying they faced bankruptcy.

Wednesday’s Abu Dhabi injection came in addition to 120 billion dirhams of emergency funding facilities launched by the central bank and finance ministry since September to defrost credit markets.

The one-month Emirates Interbank Offered Rate AEIBOR= fell to 3.14375 percent on Thursday from 3.2 percent a day earlier.

Shares of the Abu Dhabi banks jumped as much as 10 percent on Thursday after the announcement. In Dubai, Emirates NBD, the Gulf’s biggest bank by assets, fell 4.79 percent.

Reporting by Daliah Merzaban; Editing by Inal Ersan and Andy Bruce