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Sovereign cuts Dubai World adrift

Bond investors thought Dubai World was government risk. Dubai doesn’t see it that way. Sudip Roy reports.

As financial markets continue to roil following Dubai World’s request to restructure $3.5 billion of Islamic debt falling due next month, some clues behind the surprise decision can be found in the circular document for a bond offering that the government made in late October.

On October 21, the government issued a preliminary prospectus to raise $4 billion through a Euro Medium-Term Note programme. At the same time, Dubai’s department of finance issued another prospectus to raise up to $2.5 billion through sukuk bonds.

Within both documents the government itemized, for the first time, what it considered to be the obligations of Dubai Inc – the sovereign itself and related entities. Dubai World and its entities, including real estate developer Nakheel, were not on the list. It’s a crucial point that bond investors seem to have missed. Indeed the documents say that the “aggregate direct debt of the Dubai government” is only Dh71.21 billion ($19.4 billion) – much less than the $80 billion to $90 billion now being widely reported.

Those sovereign debts have since risen to $26.4 billion following the sukuk transaction – a dual-tranche offering that raised $2 billion eventually – and the $5 billion that Dubai received from two Abu Dhabi government-majority owned banks on Wednesday November 25.

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