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Gulf ABS Not a ClearLoser in Dubai Fallout
Asset Securitization Report--SourceMedia (December 7, 2009)

By Felipe Ossa

The destabilizing news out of Dubai is inarguably a negative for issuers out of the region - what many investors effectively saw as implicit sovereign support has now vanished.

But the impact for true asset-backeds in the United Arab Emirates and neighboring countries is perhaps more nuanced. In the short term, it could hurt the few existing deals, as indeed it has already sparked negative ratings actions for some. But it might also shift the economics of financing in the region to the benefit of ABS.

That hopeful view, if it proves to be valid, will manifest itself only once the dust settles. And that could take a while.

In the meantime, players are sorting out what the news means for outstanding deals. "This is the first major default by a state-owned entity in the region and has therefore been a major shock in a region with a strong tradition of support," saidRichard Fox, senior director in the sovereign ratings group ofFitch Ratings.

The shock came in the last week of November, whenDubai Worldannounced a six-month moratorium on its debt and proposed a restructuring. In a straightforward press release, the company said the workout would include itself and unitsNakheel WorldandLimitless World. Other subsidiaries were left out. The debt in question totals $26 billion, with a Sukuk, or Shariah-compliant bond, issued by Nakheel representing $6 billion of that debt. The company hired Moelis & Co. as advisors on the restructuring and said it will continue working with relationship advisors Rothschildas well.

The huge volume of debt notwithstanding, much of the shock came from what the news telegraphed: The government was not a guarantor of Dubai World, even though the company was state-owned. While many observers understood that the blow of the financial crisis to Dubai had crippled its ability to rescue struggling companies, there was a feeling that another emirate, say oil-rich Abu Dhabi, would come to the rescue as a last resort.

Indeed, in the months leading up to the announcement, there had been growing confidence that Nakheel would make a December coupon on its Sukuk.

"It was always difficult to [figure out] where the government was involved and where it was giving its explicit involvement," said Jaime Sanz, senior director at Fitch. "From now on they're going to have to be very clear about guarantees."

In the meantime, a handful of outstanding deals have fallen under greater scrutiny. How they fare will arguably shape the sector's potential comeback.

Basking in Sun Finance:
The much ballyhooed Sun Finance, a hybrid of ABS and project finance issued in September 2008, has been so far unaffected by the news.

"We don't see any particular issues in the debt service being met," said Paul Lund, director of corporate securitization atStandard & Poor's, which rates the AED2.76 billion ($751 million) A tranche 'A', the AED251 million B tranche 'BBB+' and the AED1.00 billion C tranche 'BBB-'.

Moody's Investors Service likewise hasn't made a move on the deal since the announcement, keeping the respective tranches at 'Aa3', 'A3' and 'Baa3'. There is an unrated AED1.00 billion tranche as well.

In Sun Finance, originatorSorouh Real Estatehas monetized future cash flows from the sale of real estate plots in Abu Dhabi's Al Reem and Saraya developments to property developers. The way the deal is structured, bondholders are assuming the risk of the project's success, which is largely de-linked from Sorouh.

The performance so far has been robust, but there are ways in which additional declines in property values could conceivably impact the deal.

"So far [there's been] no material impact on Sun Finance" from the Dubai World default, said a source close to the transaction. "It's hard to say going forward, as it depends on whether subdevelopers who make payments on the Sun deal have been impacted in Dubai and whether this will impact their ability to make payments more broadly."

Khalid Howladar, a senior credit officer at Moody's, said there could be a detrimental impact on asset values, "a secondary dip following the drop earlier this year." He added: "Prices had actually started to recover - but so much here revolves around confidence and psychology that this may prove another trigger."

Howladar sees no direct or indirect linkages to the recent news apart from the overall loss of confidence and further drops in asset prices, which would naturally place stress on the structure's obligors.

Lund indicated that there was plenty of room for developers to fail and the transaction to still operate smoothly. "The transaction can support 44% of the developers going into default, and its performance to date supports the ratings," he said.

One particular strength for the transaction is Abu Dhabi Commercial Propertiesas a backup property manager/servicer. "AD is highly creditworthy and has the means to push on with all their plans," Howladar said, characterizing the company as a "key anchor" in the rating.

In addition, the geography of the deal - all the properties are located on the two islands of Saraya and Al Reem - now appears to be more of a positive than the typical negative associated with a high level of concentration. Had the transaction been supported by real estate in Dubai as well, for instance, its future might look gloomier. What is more, since they are based in Abu Dhabi, the developers might be seen as safer bets than their Dubai peers, observers said.

The lead managers on Sun Finance wereAbu Dhabi Commercial Bank, Citigroup Global Markets, First Gulf Bank, National Bank of Abu DhabiandNoor Islamic Bank.

UAE CMBS: Cracks in the Facade: ,br> Unlike Sun Finance, UAE CMBS Vehicle No. 1 faced ratings trouble only days after the Dubai news broke.

Fitch cut $27.5 million in Class A notes to 'BBB-' from 'A+', $12.9 million in B notes to 'BB' from 'A' and $12.5 million in C notes to 'B' from 'BBB'. All series were put on Outlook Negative as well. Moody's, meanwhile, put its decidedly higher ratings on Review for Possible Downgrade. Its ratings for the respective tranches are 'Aa3', 'Baa3' and 'Ba1', and 'Ba3' on a D tranche. The agency had cut the B, C and D series last June.

Both Fitch and Moody's cited the Dubai World announcement and its potential damage to Dubai commercial real estate as prime drivers of the ratings moves.

The reason for this direct linkage is in plain sight: The deal is backed by a single commercial real estate loan arranged by HSBC Bank Middle East and HSBC Bank, which were also the deal arrangers. Securing the loan is a mortgage on an office building with 76 tenants located within Dubai's Technology and Media Free Zone. The loan comes due in June 2012.

"The main danger to the transaction is that the fallout from recent (and future) developments causes international occupiers in the Dubai office market to downsize their presence in Dubai or leave altogether," saidSaavan Gatfield, a director in European CMBS at Fitch. "Such an event would lead to a potentially severe depression of the occupational and investment office markets in Dubai, and consequently could cause loan income to fall and refinance risk to increase."

Trouble had been brewing before the announcement, thanks in large part to the collapse of property prices in Dubai. As of June of this year, Moody's estimated that the average LTV had risen to 77%, while the originator's figure was still 49%. In June, Moody's projected that due to additional property value declines in the region, the LTVs would further increase to around 95% in 2010.

"[As this estimate was made in June], it doesn't take into consideration the events of Dubai World," said Leokadia Szalkiewicz-Zaradzka, a senior analyst at Moody's. "We will concentrate our ratings review on the potential impact that this could have on the commercial property market in Dubai and, more specifically, the property value of the office building securing the securitized loan."

The structure also features a rental guarantee [for AED27 million] from TECOM Investments FZ-LLC, which comes in addition to the cash flow generated by the tenants of the property, which is still above the level needed to service the loan.

The benefits from that guarantee, though, might have dropped, as TECOM is a unit of Dubai Holding Commercial Operation Group, which Moody's recently downgraded.

"Now that the parent [of TECOM] is not an investment-grade company anymore, the value we are able to give to this guarantee has been diminished," said Szalkiewicz-Zaradzka.

The new take on sovereign involvement in the region has no direct bearing on the deal from a ratings perspective, as UAE CMBS didn't benefit from any real or perceived support from the government, according to Gatfield. "However, shifting perceptions could lead to reduced confidence in the economic stability of Dubai among potential occupiers of space at the collateral property," he said.

And the likely squeeze on everyone in the region might ratchet up the refinancing risk of the underlying loan, which matures in June 2012. "Due to the recent events, there could be a more challenging lending environment in the region going forward," said Szalkiewicz-Zaradzka.

Tamweel Keeps Spinning:
Touted as the region's first cross-border RMBS, Tamweel Residential ABS hasn't been hit yet by the recent turn of events, but analysts appear to have a new set of variables to work with.

"The events of the past week are significant in our analysis of support assumptions" said Moody's Howladar. "Although if originator/primary servicer default becomes more likely, we have strong and rated back-up servicing mechanisms [in Tamweel]."

The deal, which is Shariah-compliant, is backed by a portfolio of "Ijara" contracts (lease-to-buy), denominated in United Emirates dirhams and originated by Tamweel. Under these contracts, a constructed property is acquired by Tamweel and subsequently handed over as a long-term lease to the lessee for an agreed rent and specified period. Morgan Stanley hedges the deal's currency risk, as the transaction is denominated in dollars.

All the properties in the deal are located in Dubai. Moody's rates a $177.5 million A tranche 'Aa2', a $15.3 million B tranche 'Baa1' and a $9.9 million C tranche 'Ba3'. Fitch rates the respective tranches 'AA', 'BBB+' and 'BB'. A $7.4 million C tranche is unrated.

Howladar said that despite the stress of the last 12 months, including declines in property value of up to 50%, the default rate in Tamweel has kept to zero. "[That's] better than even the most prime deals in EMEA," he added.

In addition, the deal has already amortized about half its original volume. But one observer noted that lessees might fall under increasing financial pressure if conditions significantly worsen. What's more, the specter of moral hazard has reared its head - with large companies defaulting, there could be lower expectations of honoring financial commitments among borrowers in general.

Thor Gets Hammered Too:
Meanwhile, a private ABS in the region that's due in 2036 has, like UAE CMBS, already experienced bad static following Dubai World's bombshell.

On Nov. 30, Fitch downgraded the $2 billion floating-rate notes issued by Thor Asset Purchase Company, a revolving securitization of water and power receivables from customers of the Dubai Electricity and Water Authority (DEWA). The agency cut the notes to 'BBB-' from 'A-' and placed the ratings on Watch Negative.

The notes mature in 2036 and have amortized down to about $425 million, according to Moody's Web site, which earlier in November confirmed the paper at 'A1' after having put them on watch for possible downgrade in August.

"The rating...is closely linked to the government of Dubai and reflects a strong link between DEWA and the government of Dubai," Fitch said in a release. Aside from being owned by the government, the originator is Dubai's only supplier of power and water.

Finally, the noise is not likely to reverberate much on a CMBS deal in neighboring Oman, which is not an emirate. This is largely because the transaction, called Blue City Investments, was already experiencing a good deal of distress caused by the dismal sales of underlying property.

"Demand for retail villas and apartments at integrated tourism resorts (ITRs) in Oman appears to have reduced significantly over the last 18 months and has collapsed entirely on the project itself, with no sign of recovery in the short or medium term." Fitch said in a report from last July.

Silver Lining for ABS?:
It would appear that given this grim picture, one would have to be an irrepressible optimist to see any hope. But the about-face perception on sovereign support could eventually force issuers to seek out enhancement for their deals elsewhere, and it's conceivable that certain assets may come into favor as a result.

This would mark a 180-degree turn from what had been the tenor over the last year. "Post-Sun Finance [in September 2008] securitization was coming to a halt largely because the economics were pushing issuers to do straight debt or do asset-based as opposed to asset-backed Sukuks," said Debashis Dey, a partner at Clifford Chance in Dubai. "From Sept. 2008 to Sept. 2009 you had a boom in corporate debt, and to tell you the truth it was almost impossible to talk about securitization."

But the economics could be shifting to favor ABS in the aftermath of the Dubai World default.

"Before the Dubai announcement, a bank or corporate might say, 'I am linked to the sovereign. I had been borrowing easily on the open market,'" Dey added. "After the Dubai announcement, the same bank or corporate will find itself in a very different credit environment where spreads are going to go much wider."

In addition, issuers that were once highly rated are now either barely investment grade or below.

The need for a ratings uplift on a deal combined with wider spreads is a recipe for more demand to issue ABS, as any emerging market player can attest. Some local banks are sitting on auto loan and credit card books that could eventually anchor deals as large as $500 million, Dey said.

Of course, negative overhaul sentiment stoked by Dubai World could smother the potential for ABS, or at least delay its reappearance. On the other hand, an uglier financing environment might spur local investors to take ABS more seriously, Moody's Howladar said.

At any rate, one thing is for sure: After Dubai's frenzied construction boom, real estate deals are out of the question.

"On the construction and real estate side, it's safe to assume that nothing will happen," said Fitch's Sanz. "There's so much debt to work out."

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.
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