UPDATE 3-Dubai seeks debt delay, raises $5 bln more

Published: 25 Nov 2009 06:40:23 PST

* Dubai asks for debt standstill on Dubai World, Nakheel

* Credit default swaps soar

* Dubai places $5 bln bond with banks, half what expected

DUBAI, Nov 25 - Dubai's government will ask creditors for two of its flagship firms for a debt standstill, it said on Wednesday, sending the cost of insuring its debt against default soaring and bond prices tumbling.

The standstill request comes as Dubai, the crisis-struck emirate in the United Arab Emirates, struggles to meet payments on maturing portions of a combined $80 billion in outstanding obligations.

The repayment of debt issued by the two companies -- Nakheel, the developer of palm-shaped islands owned by Dubai World, and Dubai World itself -- has been viewed as a key test of the emirate's ability to meet its obligations in the economic downturn.

Nakheel has a $3.5 billion Islamic bond maturing on Dec. 14.

"The market had expected a timely repayment of the $3.5 billion sukuk and spreads had narrowed. This will destroy a lot of confidence," said Eckhart Woertz, economics programme manager at Gulf Research Centre.

Dubai also raised $5 billion from Abu Dhabi banks on Wednesday -- half of what was expected -- as part of a $20 billion bond programme launched earlier this year.

"The standstill requests comes as a surprise, especially after additional finance from Abu Dhabi has been raised," Woertz said.

The cost of insuring Dubai government debt against default using 5-year credit default swaps soared, jumping over 100 basis points to 420.6 from a close of 318 one day earlier. Nakheel's Islamic bond prices fell more than 20 points to 87.

"Although this is disappointing and not in line with our core scenario, the fact is that it has only been delayed by six months is on the positive side," said economist Monica Malik at bank EFG-Hermes in Dubai.

"We have very low visibility and an improvement in transparency would be positive," she said.

Dubai's economy has been hit hard as the global credit crunch saw an end to a six-year boom in the region and sent the emirate's once-flourishing property sector into decline.

The emirate -- one of seven members of the UAE federation -- and its state-linked firms have outstanding debt of about $80 billion, much of it incurred during a drive that saw Dubai expand activities in logistics, financial services, property and luxury retail and tourism.

"I would think creditors would react quite negatively unless they were previously briefed," said Keith Edwards, head of asset management at Doha-based investment company The First Investor.

"Dubai credit default swaps have expanded since June and I wouldn't be surprised if there was a further expansion."

DEBT RAISING

In a separate move the government said was not connected to the Dubai World restructuring, Dubai raised a further $5 billion as part of a $20 billion bond programme launched this year, half of what it previously said it would raise.

The $5 billion tranche had a maturity of five years and paid four percent interest and was placed with two Abu Dhabi-controlled banks, the National Bank of Abu Dhabi <NBAD.AD> and Al Hilal Bank, officials said.

The first $10 billion tranche in the programme was taken up by the United Arab Emirates central bank earlier this year as Dubai sought to raise funds to support state-linked companies.

The $5 billion was placed with two banks controlled by the Abu Dhabi ruler or government, a move likely to underscore the continued support for Dubai from it's wealthier neighbour.

"Although it has not come from a federal source ... both of the banks are Abu Dhabi-government controlled banks," Malik said. "It's in line with our view that there will be limited pure-private interest," she said.

Economist David Butter at the Economist Intelligence Unit said the bond was an elegant way for Dubai to avoid going back to the central bank, owing to the difficulty of attracting interest from international banks.

"Dubai will be able to state that it has raised what it needs from the market, without any suggestion of an Abu Dhabi bailout," he said.

Dubai has said previously that the proceeds from its bond scheme would underpin companies such as Nakheel, as part of its drive to build tourism as an alternative to its dwindling oil.

But further details are scarce about what Dubai has done with the first $10 billion, what it plans to do with the new $5 billion, and why it only issued half of what it said it would issue only weeks earlier.

"Any news from the financial stability fund has been absent since it has been launched," said economist Caroline Grady at Deutsche Bank.

"We haven't heard anything other than the headline in May that some of the money was used to refinance debt at Nakheel." (Reporting by Rachna Uppal, Andrew Hammond, Matt Smith, Nicolas Parasie, Enjy Kiwan and Carolyn Cohn; Writing by Thomas Atkins; Editing by Andy Bruce) (