Dubai rallies as debt deal seen near

By Matt Smith and Stanley Carvalho

DUBAI/ABU DHABI, March 11 (Reuters) - Dubai's market rallied to seven-week highs on Thursday on hopes for a Dubai World debt deal while some major creditor banks halted internal trading in the firm's instruments, signalling an offer was approaching.

State-owned conglomerate Dubai World held talks with its main lenders this week, including Standard Chartered and HSBC, as it finalises a plan to restructure $26 billion in debt linked to property units Nakheel and Limitless World.

Signs a deal is imminent grew as Standard Chartered put internal restrictions on trading in Dubai World-related instruments and HSBC was seen following suit.

The National newspaper, citing unnamed sources, said the firm put its first concrete proposals to local banks on Thursday, something a Dubai government spokeswoman later denied.

But speculation about a deal helped push Dubai's index to its highest level since Jan. 14 while the cost of insuring Dubai sovereign debt for five years fell 10 basis points from the previous session. Nakheel saw its 2011 bond rise to a two-month high. "People want a resolution so they can start doing some fundamental analysis," said Keith Edwards, head of asset management at Doha-based investment company The First Investor.

"The expectation seems to be for a 20 percent haircut, a 10-year extension and a government guarantee -- if there's anything less than that there could be a correction."

Dubai's proposal may include more than two tranches in an effort to meet the needs of the 97 creditors of Dubai World.

Local banks with little lending power may want whatever they can get from Dubai World quickly, while international lenders with big balance sheets can afford to wait for full repayment.

Two of the restructuring options include repayment over three to five years with the principal discounted, and repayment over seven to nine years with no discount. How much of a "haircut" is included on the shorter-term deal depends on how much money Abu Dhabi stumps up.

Abu Dhabi, the richest and largest in the United Arab Emirates' federation, bailed out Dubai in December and is expected to help again albeit grudgingly as it calculates the financial cost of not aiding its flashier neighbour.

Moody's downgraded seven Abu Dhabi-linked firms last week, citing a lack of an implicit government guarantee.

Dubai World is in talks with a panel of seven major creditors, which include HSBC, Standard Chartered, Royal Bank of Scotland as well as local banks, Emirates NBD and Abu Dhabi Commercial Bank.

ADCB is the most exposed to Dubai World among Abu Dhabi lenders with $1.9 billion outstanding.

Unlike Emirates NBD, which is 56-percent owned by Dubai's sovereign wealth fund and may be more likely to accept a deal, ADCB may fight as the representative bank from Abu Dhabi.

Dubai is expected to make a formal proposal to creditors before announcing its intentions for a $980 million Islamic bond or sukuk issued by Nakheel, which comes due in May.

Abu Dhabi helped Dubai avoid an embarrassing default on another Nakheel sukuk but a debt swap is seen as the most likely option this time.

(Additional reporting by Sebastian Tong in London)

(Reporting by Stanley Carvalho; Editing by Thomas Atkins)