Dubai debt fears hammer Asia banks, builders

Banks and builders bore the brunt of selling pressure across Asia on Friday as investors fretted that exposure to Dubai could further squeeze profits already hit by the global economic downturn.                                           

Shares of leading banks including HSBC Holdings and Standard Chartered tumbled 7-8%, and property developers such as Australia's Leighton Holdings, and Japan's Obayashi Corp were dumped on fears of losses from some of Dubai's extravagant construction projects.                                           

"Dubai is a real shock to the market," said Richard Morris, investment manager at Constellation Capital Management in Sydney. "Everybody's been playing the risk trade and this is a reminder of what went on during the global financial crisis.

"This will cause a shifting back to a more defensive stance." Dubai has spooked financial markets since Wednesday when it said two flagship firms planned to delay repaying billions of dollars in debt.

State-backed Dubai World has $59 billion of liabilities -- a big chunk of the emirate's total debt of $80 billion. Standard & Poor's and Moody's Investors Service have sharply cut their ratings on several government-related entities, with Moody's slashing some units to junk status and S&P saying the restructuring could be considered a default.

"Within banking specifically, the biggest exposure appears to be with Standard Chartered and, secondly, with HSBC, followed by DBS," said Daniel Tabbush, Asia banks analyst at CLSA in Bangkok.                                                                                   

Coy on clients                                        
Few of Asia's big banks would comment on their exposure, with most saying they did not talk publicly about loans to specific clients. Standard Chartered said in a statement it was aware of its disclosure obligations and would make a statement in the event it had anything material to disclose.                                           

Goldman Sachs said its initial worst-case loss estimates were $611 million for HSBC and $177 million for Standard Chartered. An official for HSBC declined to comment. The London-based bank may have assets of around $9.7 billion in Dubai, Singapore's DBS has estimated.                                           

No one at DBS was immediatedly available for comment on the bank's own exposure, and its shares were untraded due to a market holiday. HSBC, and Japan's Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group, were among the bookrunners on an outstanding $5.5 billion syndicated loan to Dubai World in June 2008, according to Thomson Reuters LPC data.                                           

Banks may have sold down their loan exposure in the secondary market, and one analyst estimated bookrunners typically retain only about 10-15 percent of a loan or bonds.

A unit of Dubai World, Dubai Drydocks, signed a $2.2 billion loan in October 2008, involving 15 lenders, according to Thomson Reuters LPC. Bookrunners on that loan included HSBC and Standard Chartered.                                           

Sumitomo Mitsui, Japan's third-ranked bank by assets, and Australia's Westpac Banking Corp were among the banks that took part in the financing. Officials for Japan's top three banks, Mitsubishi UFJ, Sumitomo Mitsui and Mizuho Financial Group, said they do not comment on individual deals.                                           

Shares in Mitsubishi UFJ fell more than 2% in Tokyo, and Sumitomo Mitsui and Mizuho both lost nearly 4%.                                           

                                                                             
Taiwanese concern                                           
Westpac said it had little financial exposure to Dubai World and expected no material loss. Other Australian banks, Macquarie Group, Australia and New Zealand Banking Corp and National Australia Bank Ltd, said they had no material exposure to Dubai.

Taiwan's fourth-ranked Mega Financial said it had exposure to Dubai World loans and was trying to find out how much. "We are very concerned about the situation," Grace Lin, an executive vice president, told Reuters by phone. "We heard some other Taiwan banks also have exposure."                                               

In South Korea, the Financial Supervisory Service has said the country's financial institutions'' exposure to Dubai was just $88 million, but shares in KB Financial, Shinhan Financial Group and Woori Finance Holdings all fell by around 4%. 

"Although local banks' exposure is negligible, falls in European bank stocks and broader concerns about global banks' exposure are pressuring the sector," said Lim Il-sung, an analyst at Meritz Securities. "A potential rise in risk premiums may render borrowing costs heavier for banks."                                           

South Korea's construction subindex shed nearly 7%, led lower by Samsung C&T and Hyundai Engineering & Construction. Samsung C&T said it was working on a project from Dubai's Nakheel worth $350 million, Australian builder Leighton, majority owned by Germany's Hochtief, said it was owed money on a few separate Dubai building projects, but the situation was not new.                                           

"We are confident we will recover the debt but the timing is uncertain," a spokesman told Reuters. He did not name the projects or give details on how much was owed. Leighton shares lost 4%. In India, shares in DLF the country's biggest listed real estate firm, fell as much as 8%.