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22 April 2024

DW debt restructuring reduces NPLs for UAE banks: Moody's

Ratings agency says restructuring is particularly positive for Emirates NBD bank. (Supplied)

By Staff

Dubai World's (DW) second debt restructuring is credit positive for the UAE banking system, particularly for Emirates NBD bank, said Moody's Investors Service on Monday.

DW reached an agreement with a majority of its creditors on a second restructuring of its $14.6 billion outstanding debt. The new features of the agreement will reduce the overall risk profile of the exposure, Moody's said.

The terms of the second restructuring broadly include an early repayment of the 2015 tranche of $2.96 billion; an extension of the 2018 tranche of $11.7 billion to 2022, with an amortising repayment structure; an enhanced security package; and commercial coupon rates.

"These features improve the overall risk profile of the exposure and in particular reduce the tail risk associated with the prior restructurings' bullet maturity," said Olivier Panis, Senior Analyst at Moody's.

"As such, we will reclassify the loans to 'performing' from 'impaired' for our metrics," he added.

According to Moody's projections, the reclassification of the restructured DWG debt brings UAE's asset quality and coverage of problem loans by loan loss provisions closer to that of the GCC average.

"This reclassification will contribute significantly to an improvement in Moody's key banking system ratios," noted Nitish Bhojnagarwala, a senior analyst at Moody's.

"UAE banks' non-performing loans to gross loans ratio is expected to fall substantially to around 6 per cent at year-end 2014 from 9.2 per cent in December 2013 - a credit positive for the UAE banking system" he added.

The restructuring is particularly positive for Emirates NBD, the largest domestic creditor of DW with a $2.3 billion exposure that continued reporting the DW exposure as impaired after the first restructuring of 2011.

"The bank's NPL ratio has substantially declined to 8.3 per cent as of December 2014 from 15.1 per cent as of December 2013, with a material 50 per cent of this decline resulting from the our DW reclassification to 'performing,'" noted Panis.

The bank's loan loss coverage and Tier 1 ratios also improved to 93 per cent and 18 per cent, respectively.

"DW, together with various other Dubai government related entities, contributed around 30 per cent to the system-wide NPL peak of 10.5 per cent in 2011 and highlighted the concentration risks endemic amongst the GCC banks," said Khalid Howladar, Senior Credit Officer.

"Although the recent oil price collapse has increased the downside risks of the regional operating environment for the UAE's local banks, this more sustainable resolution of the GCC's largest legacy default reduces one of the key uncertainties facing the UAE banking system," he added.