Dubai default risk plunges to pre-crisis level

The cost of insuring five-year Dubai debt against default plunged to its lowest level since last November as investor concerns over the debt restructuring of the emirate’s various entities subsided.

Dubai’s five-year credit default swaps (CDS) dropped around 33 basis points, or 8 per cent, Tuesday and another 10 points this morning, and are currently around 375bp, according to CMA DataVision’s Sovereign Risk Monitor.

The CDS are now hovering around the same levels where they were in November last year before the Dubai government announced a standstill on debt held by Dubai World.

The CDS had peaked this year at 655bp in February, and have dropped about 43 per cent since then. Even until the end of the second quarter this year, Dubai’s CDS remained around 500bp.

However, the perception of default and with it the CDS have been on a steady decline since Dubai World announced an agreement with 99 per cent of its creditors last month.

Since then, in a sign of improved confidence, the Dubai government has gone to international markets with a $1.25 billion dual tranche sovereign bond, which was oversubscribed four times.

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.
 

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