Banks’ role in $10bn funds made clear – The National Newspaper

So it took us over a month to get this cleared up?

The US$10 billion (Dh36.73bn) in financial assistance to Dubai announced last month by Abu Dhabi includes $5bn committed in November by two Abu Dhabi-controlled banks, Dubai said yesterday.

via Banks’ role in $10bn funds made clear – The National Newspaper.

I wish I could say this article had some more tidbits about the standstill agreement that Dubai World is trying to negotiate with its creditors, which is a necessary condition to receiving the $5.9bn after the $4.1bn sukuk was paid off. But it doesn’t.

Instead, it raises some questions in my mind in terms of what Abu Dhabi will do. We now know the $10bn commitment includes $5bn for bonds the two banks (Al Hilal Bank and National Bank of Abu Dhabi) bought on Nov. 25 as well as the payoff of the sukuk. Stay with me here, because the cash seems to be running out fast. By this tally, it looks like there’s about ~$900mn left. Indeed, further in the article, there’s this:

Analysts and bankers consulting with the governments of Abu Dhabi and Dubai, speaking on the condition of anonymity, said that as part of its $10bn investment in Dubai bonds, Abu Dhabi plans to assume the remainder of the banks’ $5bn purchase commitment.

Or is it?

A spokesperson for the Dubai Government confirmed yesterday that the latest financial package included the $5bn, but declined to comment on how Abu Dhabi planned to channel the funds. Neither Abu Dhabi’s Department of Finance nor Al Hilal Bank could be reached for comment.

So does the Abu Dhabi package support the banks or not? Simple answer? Clear as mud:

Some analysts believed that Abu Dhabi would route its funds through local banks, including the $4bn still available under NBAD and Al Hilal’s November 25 contract.

In return for buying Dubai’s bonds, the banks would receive an equivalent amount from the Government in the form of deposits.

But analysts and bankers say Abu Dhabi is instead planning to buy the bonds directly through the Department of Finance, relieving NBAD and Al Hilal of their commitments.

I don’t know. It seems like there’s two ways to execute these purchases, one way could bolster the banks, the other may not. Maybe I’m reading this wrong, but that’s the way it reads to me.

Which means there are two possible objectives at work here: 1) bolster the banks by buying their bonds and depositing cash (which bolsters liquidity and would pre-empt a bank run) or 2) buying bonds from the market which would absorb the supply of bonds, but does nothing for the banks.

If they’re focusing on the second objective, I assume there must be talk of a debt-to-equity conversion where Abu Dhabi essentially takes over projects from Dubai World.

But for what? Who really feels like staying at a palm-shaped island resort and skiing indoors? The short answer is: not as many people as they thought.

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Filed under International, macro, Markets, Way Forward

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