Too quick to PIK?

Too quick to PIK?

The deals set to haunt European high yield

Turkey looks to diversify infrastructure debt

Turkey looks to diversify infrastructure debt

Banks not be able to shoulder the debt burden

Tuesday, December 1, 2009

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  • This is absolutely right. Being precise about guarantees is the first rule of bond investing and investors should be kicking themselves.
    However, put yourself in the position of the owner of a financially strapped company. Would you not do everything you could to support it, and only let it default if you had no other options and were prepared to let it be liquidated? Both Dubai World, vis a vis Nakheel, and the government, vis a vis Dubai World, seem not to feel this way.
    Analysis should focus on what rights the Nakheel bondholders have to wrest the company from its owners, who no longer want to support it. If they have none, they should kick themselves afresh - and never lend to Dubai again without cast iron security.


    01 Dec 2009 11:50

    Author: JON HAY


Dubai debt crisis: Nakheel bondholders have to take the pain

Dubai World’s restructuring shows investors cannot make any easy assumptions when it comes to quasi-sovereign debt. By Sudip Roy.


‘Read the small print’ should be the mantra of any investor in any security. In the case of Dubai World and its entities the key sentence about its status are in bold type and large font on page 35 of the prospectus for Nakheel’s $3.52 billion sukuk bond.

The document was published on December 13, 2006. Under the heading of ‘Risks Relating to Dubai World and Dubai World Group’ it says: “Dubai World is a public corporation established pursuant to Law No. 3 of 2006 issued by His Highness Sheikh Mohammed Bin Rashid Al-Maktoum as Ruler of Dubai. Investors should note, however, that the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World.”

If that wasn’t clear enough, the same statement is repeated on page 95 under the heading of ‘Relationship with the Government’: “The Government does not guarantee any indebtedness or any other liability of Dubai World or any member of the Group. In addition, there is no day-to-day involvement of the Government of Dubai in the management of Dubai World, which operates independently of the Government of Dubai.”

Investors can scream until they are blue in the face about how they have been misled by the Dubai government. No doubt the authorities have handled the situation badly, wrecking Dubai’s credibility in the financial markets.

But investors who believed that Nakheel’s debts were sovereign-backed have only themselves to blame.

The only guarantor of Nakheel’s debts is Dubai World, not the government. Dubai World and Nakheel are 100%-government owned but, as Abu Dhabi newspaper The National points out, because they are joint-stock companies the government’s liability for their credit is limited to their paid-up capital.

Under these circumstances the government is perfectly entitled – and morally obliged – to not bail out Nakheel’s investors.

The Nakheel crisis goes to the heart of what is and what is not government-backed debt. A similar situation arose in the Ukraine when state-owned gas company Naftogaz technically defaulted on the repayment of principal on $1.6 billion of debt on September 30.

Many investors were outraged assuming that the government would step in, especially after the country’s 2009 budget law was amended to include a clause that “the government may provide a guarantee for Naftogaz external borrowings...in case the company cannot honour its obligations.”

The amendment, however, did not commit the government to paying Naftogaz’s debt. Although there was a strong sense within the government that it should support Naftogaz that did not mean making bondholders whole on a timely basis.

Eventually Naftogaz completed a successful restructuring with the new bond including an irrevocable and unconditional sovereign guarantee.

With government tentacles spreading to all parts of the global financial markets investors should check what their legal rights are in the event of further defaults of so-called quasi-sovereign debt. They can’t say they haven’t been warned. 



Reality bites Dubai
November 2009

What is the Dubai government’s debt?  
30 November 2009

Dubai World shocks investors 
26 November 2009

Sovereign cuts Dubai World adrift
27 November 2009


Nakheel bondholders have to take the pain
1 December 2009 

At Dubai World’s end
December 2009 

Ian Hay Davison, Dealing with Dubai: The regulator's tale
September 2005
In 2002 the Dubai authorities announced the appointment of a distinguished chairman to its financial regulator that would give credibility to the country's attempts to establish itself as the leading Arab financial centre. Just two years later he was fired. Ian Hay Davison gives an exclusive first-hand account of the events that led to his dismissal.