So big brother paid up in the end. Abu Dhabi’s decision to inject $10 billion into Dubai’s Financial Support Fund in mid-December has averted a possible default by troubled real estate developer Nakheel and given Dubai’s government breathing space following three weeks of market turmoil.
But Dubai’s troubles are far from over. Even though Nakheel’s bondholders should be paid, its parent, Dubai World, the government-controlled investment company, is still planning to restructure $22 billion of its debts. That includes bilateral and syndicated loans as well as unpaid bills to contractors. UK banks are believed to have the biggest exposure at more than $5 billion but more than 90 banks are involved.
Initial reports suggest that the process will be long and complex, with lenders seeking a restructuring over several years, including the sale of some Dubai World assets. Reaching agreement with Dubai World’s creditors is essential for the emirate’s government, not least because Abu Dhabi’s funding is contingent on such a deal.
Beyond Dubai World, Dubai has other debt worries. Its companies still face $50 billion in repayments over the next three years, according to analysts, with $13 billion due to be repaid this year and $25 billion in 2011.
How these debts will be funded is unclear. Dubai cannot rely on Abu Dhabi’s largesse indefinitely. Nor is it in Abu Dhabi’s interests to continually bailout its profligate neighbour. It seems likely that further aid would be provided only to systemically important entities. But which are they? The banks? Most probably. State-owned real estate developers? Significant private-sector companies, such as property firm Damac or the Al-Futtaim Group? No one knows.
And unless these companies are generating positive cashflows they are unlikely to find much support in the financial markets either.
More than anything, though, Dubai’s financing prospects will remain uncertain until there is greater clarity about the ownership structure of the emirate’s investment vehicles and the companies in their portfolios. Which are private investment vehicles for Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum? Which are government-owned and what does that mean anyway when it comes to repaying their debt?
Although a state investment company owns Nakheel, its bonds were not sovereign backed. Investors assumed they were. To that end, the Dubai government was perfectly entitled not to bail out the bondholders. Now that it has done so thanks to Abu Dhabi’s cash its actions might, ironically, cause even greater confusion in the future if it fails to match the precedent set.
As Philipp Lotter of Moody’s says: "Markets hate uncertainty, but they loathe unpredictability."
Dubai World Creditors To Sell Loans
01-19-2010 emii.com
Dubai debt crisis: Nakheel bondholders have to take the pain
1 December 2009
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
