Dubai's Nakheel regains ground; Latin emerging markets steady despite S&P downgrade of Mexico

By Paul Deckelman and Paul A. Harris

St. Louis, Dec. 14 - Middle Eastern sovereign and quasi-sovereign debt regained some ground in emerging markets trading Monday on news that Abu Dhabi would step in to prevent a default on the sukuk of Dubai World's property unit, Nakheel PJSC.

News that Standard & Poor's downgraded Mexico's sovereign debt to BBB from BBB+ had been priced into the market, and failed to kindle a sell-off in Mexican or Latin American bonds, sources said.

But overall emerging markets passed a generally quiet Monday, sources said.

The EMBI-Plus index ended the New York session at a spread of 296 bps bid, 2 bps tighter on the day.

Nakheel jumps

A trader said that Dubai property development company Nakheel's bonds zoomed on the news that Dubai's Persian Gulf neighbor, Abu Dhabi, is providing the embattled emirate with $10 billion, which will allow it to pay off the $3.52 billion of 3.172% sukuk bonds slated to come due during this session.

"They're getting paid off," he said of those bonds, "so now the other one are up 30 points," referring to the floating-rate notes due 2010 and the 2¾% notes due 2011, which he quoted in a 62-64 range.

A market source at another desk said those bonds got as good as 67½ -- well up from levels around 36-39 on Friday - while the 3.172s jumped from Friday's close at 53 to 109 on Monday - just a touch below where those bonds had been trading before Dubai announced to the world back on Nov. 25 that its state-run Dubai World development conglomerate, Nakheel's corporate parent, would ask its creditors for a standstill that would it allow it to delay repayment on a portion of its $59 billion of debt while it tried to restructure that debt. That sent the 3.172s eventually cascading down over several subsequent sessions as far as the 42 bid level, while the floaters and the 23/4s eventually plunged into the upper 20s from prior pre-news levels in the 80s.

The first trader said it was impossible to estimate the activity level in the bonds because "they're eurobonds, so they don't have to Trace, but I would think they did trade because they were quoted as being active."

He agreed with the general proposition that there's nothing like having a savior - in this case, Abu Dhabi - rising to the company's rescue, "as long as you weren't one of the guys who [went] short" on the paper.

Dubai is bailed out

Overall coming into the U.S. session, emerging markets debt had a good trajectory, having traded higher in the Asian and European sessions, sources said.

The catalyst was the news that Abu Dhabi had provided fellow United Arab Emirates-member Dubai with $10 billion to help Dubai restructure its debt.

At the European close Emirate of Dubai five-year CDS were at 422 bps mid, 22 bps tighter on the session.

Meanwhile Emirate of Abu Dhabi five-year CDS closed the European session at 150.75 bps mid, 6 bps tighter on the session.

Qatar five-year CDS were at 100 bps mid, 7.75 bps tighter.

Lack of transparency

Although Middle Eastern debt prices recovered some ground on Monday, Enrique Alvarez, head of Latin American fixed-income research at IDEAglobal, said that ultimately the events in Dubai that have been creating jitters in emerging markets and beyond over the past two weeks will likely represent increased costs to the sector.

Investors found themselves in unknown territory, the IDEAglobal strategist said.

"The normal transparency for debt creation was not exactly there," he remarked.

"There was no clarity on recourse."

Hence, Alvarez said, it is not unreasonable to expect a reallocation process in the new year, in which cash could move into emerging Asia and emerging Latin America, and out of the Middle East.

Mexico cut priced in

Also on Monday, emerging markets observers in New York learned during the afternoon that Standard & Poor's downgraded the foreign-currency sovereign credit rating on Mexico to BBB/A-3 from BBB+/A-2 and the local-currency rating to A/A-1 from A+/A-1.

"The downgrades reflects our assessment that Mexico's recent steps to raise non-oil revenues and improve efficiencies in the economy will likely be insufficient to compensate for the weakening of its fiscal profile," explained Standard & Poor's credit analyst Lisa Schineller.

"This weakening stems from a combination of modest GDP growth prospects and diminished oil production over the coming years."

The revenue measures approved in the 2010 budget should address immediate concerns about fiscal vulnerability to volatile oil revenues, S&P commented.

However, the inability to widen the tax base substantially, along with a low likelihood of major tax reform in the next several years, suggest that Mexico's debt profile will remain more in line with that of its BBB peers.

Shortly after the news circulated, an emerging markets syndicate banker in New York, who focuses on Latin American credit, said: "It was widely expected, and there did not appear to be any negative reaction to that at all."

No knee-jerk reaction

IDEAglobal's Alvarez concurred.

"There is no knee-jerk reaction," Alvarez said.

"Mexico had put forth a lobbying effort in an attempt to get S&P to hold the line.

"However it was understood that Mexico had not done enough on the revenue side, and that S&P likely would take action around this part of the year.

"That was known to the market, which is why there was no real volatility attached to this news."

The Mexico downgrade notwithstanding, Latin American debt traded a little better on Monday, Alvarez said.

High-grade paper was a touch firmer.

Brazil's global bonds due 2034 were at 130¼ bid, 130 3/8 offered at the close, up 3/8 to ½ point on the day, he said.

Meanwhile investors were filtering back into high beta Latin debt.

Venezuela was attracting a bid on local stories that the government would take advantage of lower prices to buy back some of its debt securities.

Argentina improved on news that its government is preparing to move ahead with documentation for its anticipated debt swap.

Liquidity dying down

The primary market failed to generate any news on Monday, sources said.

"The door should be open until Thursday for issuers," a New York banker said, but added the expectation that no issuers are likely to show up this week.

"Liquidity is slowly starting to die down," Ideaglobal's Enrique Alvarez said.

"People are squaring positions ahead of year-end, and there will be little risk-taking during the run-up to the new year."

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