Saturday, November 28, 2009

Memo to Credit Investors: Please Stop Jumping Aboard the "Assumption" Bandwagon

Sigh. When will bondholders ever learn their lesson - that they should not invest in shaky bonds on the mere "assumption" that a rich benefactor will be around to bail'em out? Well it seems Abu Dhabi has taken up the cause to teach these gullible folks a lesson. Reuters is reporting that Abu Dhabi has just mailed out a neatly typed "thanks but no thanks" memo to Dubai World bondholders, in which they clearly outlined their noble intentions - Abu Dhabi will cherry pick the best assets for cheap and stick the rest of the clunkers to bondholders.
Abu Dhabi, wealthy capital of the United Arab Emirates, will "pick and choose" how to assist debt-laden neighbor Dubai, a senior official said on Saturday, after fears of a Dubai default sent global markets reeling.
"We will look at Dubai's commitments and approach them on a case-by-case basis. It does not mean that Abu Dhabi will underwrite all of their debts," the official in the government of the emirate of Abu Dhabi told Reuters by phone. Selective assistance for companies in "Dubai Inc.," a network of quasi-sovereign industries, instead of blanket assistance, would serve a rude awakening to investors who for years assumed that the conservative Abu Dhabi provided a safety net for its racier neighbor.

For the investing world that has once again gone bananas in their excitement to chase the "emerging market" riches, a decent dose of "rude-awakening" is probably a well-deserved medicine at this point.

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