Dubai debt no longer among the riskiest

The cost of insuring five-year Dubai debt against default plunged to below its pre-crisis levels over the weekend, with the emirate no longer among the top 10 default probables.

With the emirate’s economic engine roaring back to life in the first five months of 2011, as signalled by Emirates airline’s recent successful bonds programme, Dubai’s five-year credit default swaps (CDS) dropped to below 325 basis points on Friday, June 3, according to CMAVision’s Sovereign Risk Monitor.

Continuing their recovery that began with Dubai World announcing a positive resolution to its debt accord with about 100 lenders, and feeding on positive economic and financial investment sentiment, Dubai’s CDS are now hovering below the levels where they were in November 2009, before the Dubai government announced a Dubai World debt standstill.

The CDS peaked last year at 655bp in February, and have halved since then. The decline totals about 83 basis points since the end of Q1 2011, when they were around 407 basis points, according to data by CMAVision.

Dubai-based Emirates airline, the world’s biggest airline by the number of passenger it ferries every year, sold $1b worth of five-year bonds last week, yielding 330 basis points over the benchmark mid-swap rate.

Dubai debt default came into global limelight after the DW standstill announcement, with the CDS rate fluctuating massively at every minor and major announcement by the company and other sovereign Dubai firms. With investors no longer considering Dubai debt among the world’s riskiest, the emirate’s debt debacle now seems to be dying its natural death.

While Dubai’s debt woes received massive media attention in the past, some of Euro Zone’s debt woes are now coming to the fore, with the debt of three European nations among the 5 riskiest debts in the world.

Greece’s debt tops the world’s highest default probabilities at 1,523 basis points, Portugal is at No. 4 (684bp) and Ireland (664bp) rounds up the top 5. The other nations among the top 5 default probables are Venezuela (No. 2; 1107bp) and Pakistan (No. 3; 829bp).

CDS are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A basis point is 0.01 percentage point.

Despite the recent steady decline in the Dubai CDS rate, analysts believe that the rate remains high in comparison with some of the other global sovereigns.

Source: CMAVision’s Sovereign Risk Monitor