Dubai: The second round of a $14 billion (Dh51.4 billion) debt restructuring announced by state-owned conglomerate Dubai World Group (DWG) last month will benefit the UAE banking sector in terms of the overall asset quality, analysts with credit rating agency Moody’s have said.
The terms of the second restructuring 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.”
DWG exposures, together with various other distressed Dubai government-related entities, contributed around 30 per cent to the system-wide non performing loans (NPL) of 10.5 per cent in 2011 and highlighted the concentration risks of the GCC banks.
Since 2011, the high government spending (particularly in Abu Dhabi) and continued recovery in core, private-sector economic sectors (particularly in Dubai), have driven an overall recovery in the UAE’s operating environment.
Over the last few years problem loans have declined in parallel with recoveries, write-offs and improving corporate profitability. This economic recovery created the conditions for a new restructuring of the DWG debt exposure, which was still at 22 per cent of system-wide NPL total of 8.7 per cent as of June 2014.
According to Moody’s projections, the reclassification of the restructured DWG debt brings the UAE’s asset quality and coverage of problem loans by loan-loss provisions closer to that of the GCC average.
“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,” said Nitish Bhojnagarwala, a senior analyst at Moody’s.
As already reflected in the 2014 financial results of Emirates NBD, the restructuring has been particularly positive for Emirates NBD (ENBD), the largest domestic creditor of DWG with a $2.3 billion exposure that continued reporting the DWG 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 DWG reclassification to ‘performing’,” said Panis.
ENBD’s loan loss coverage and Tier-1 ratios also improved to 93 per cent and 18 per respectively at the year-end 2014.
“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” said Khalid Howladar, senior credit officer at Moody’s.
