In November, boutique investment firm Exotix shattered the benign market consensus that the repayment of a bond issued by Nakheel, a debt-laden Dubai real estate developer, due in December 2009, would come through thanks to a bailout from Abu Dhabi.
“A lack of funds and a weak business plan may still force Nakheel into a restructuring,” Exotix wrote. Six days later the Dubai government set off global market jitters after it said it would ask creditors to agree on a standstill of debt held by Nakheel and Dubai World (the largest government-owned investment company in the United Arab Emirates).
Sell-side research operations, notably Barclays Capital in January and Deutsche Bank in August/September, did explore in detail various repayment scenarios, given the uncertainty over the timing and manner of the redemption of the Nakheel bond. But they held the sanguine view that Abu Dhabi would ride to the rescue that month.
Research houses were, therefore, caught off-guard by the December announcement, the biggest credit event in the Gulf for years.
Although the Nakheel bond was eventually repaid in May, Exotix wisely sounded the alarm bells, and investors who cut their exposure on the 2009 bond shielded their losses as the paper sank from 110¢ on the dollar to 40¢ in the December tumult. A messy restructuring of Dubai World’s estimated $14.4 billion debt is now taking place.
Over the year Exotix has provided in-depth analysis on different restructuring scenarios that fleshed out possible recovery values for Nakheel and Dubai World-affiliated debt.
Investors often bemoan analysts who appear dogmatically wedded to a position if initially vindicated by events. Crucially, Exotix made constructive and bullish calls in January on Dubai International Financial Centre Investments (DIFCI) bonds and other cash-rich Gulf credits, whose notes have subsequently rallied.
In sum, Exotix’s prescient, in-depth and practical investment commentary stood out from the crowd.
Its boutique size helped too: many sell-side researchers were unable to comment on the Dubai World restructuring process specifically, due to the large-scale exposures of the respective institution, with UK banks alone having an estimated $50 billion of total exposures to Dubai World.