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Heavy fog rolls by early in the morning near the Dubai Marina - Source: Reuters -
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Dubai will ask creditors of two of its flagship firms for a
standstill on debt worth billions of dollars as a first step
towards restructuring Dubai World, the conglomerate which
spearheaded the emirate's breakneck growth.
The government's announcement, which said consultants Deloitte had
been appointed to help with the restructuring, sent the cost of
insuring Dubai's debt against default soaring and bond prices
tumbling.
State-run Dubai World has $81 billion of liabilities, its
subsidiary Nakheel said in August, a large proportion of Dubai's
total debt of $110 billion.
Analysts expect financial support from deep-pocketed Abu Dhabi, a
neighbouring member of the United Arab Emirates, to keep Dubai
afloat.
But Dubai will likely have to abandon a flamboyant economic
model that focused on heavy real estate investment and inflows of
foreign capital.
"It's shocking because for the past few months the news coming out
has given investors comfort that Dubai would most probably be able
to meet its debt obligations, and most analysts were of the view
that Nakheel's commitments would be met," said Shakeel Sarwar, head
of asset management at SICO Investment Bank.
"Abu Dhabi has been supportive of Dubai, but it appears this
support is not enough for Dubai to meet its obligations on
time."
Six-month standstill
The government said in a statement: "Dubai World intends to ask all
providers of financing to Dubai World and Nakheel to 'standstill'
and extend maturities until at least 30 May 2010."
Nakheel, developer of iconic palm-shaped residential islands owned
by Dubai World, has a $4.8 billion Islamic bond maturing on
December 14 and debt worth 3.6 billion dirhams ($1.3 billion) due
on May 13, 2010.
Limitless, another Dubai World developer, has a $1.6 billion
bond maturing next March 31.
The announcement appeared to be timed to minimise its impact on
markets; it came after the stock market shut and just before the
eve of the long Eid al-Ad holiday, which will close many firms and
government offices in Dubai and the Gulf until December 6.
But the cost of insuring Dubai government debt against default with
five-year credit default swaps soared, jumping over 100 basis
points to 420.6 from a close of 318 a day earlier.
Nakheel's Islamic bond prices fell more than 20 points to
87.
"The market had expected a timely repayment of the $4.8 billion
sukuk and spreads had narrowed.
This will destroy a lot of confidence," said Eckhart Woertz,
economics programme manager at Gulf Research Centre.
"The standstill requests comes as a surprise, especially after
additional finance from Abu Dhabi has been raised."
Dubai's economy was hit hard as the global credit crunch over the
past year ended a six-year boom in the region and sent the
emirate's once-flourishing property sector into decline.
In a surprise move last weekend, the ruler of Dubai, Sheikh
Mohammed bin Rashid Al Maktoum, reshuffled the board of the
Investment Corporation of Dubai, which manages his wealth, and
changed the chief of the Dubai International Financial
Center.
The reshuffle, which removed boom-era leaders from key positions,
was widely seen as a shift towards more conservative stewardship of
Dubai's resources.
Dubai's announcement shook the confidence of investors in
government debt elsewhere in the region; credit default swaps for
Abu Dhabi, Saudi Arabia and Qatar also rose, by more modest
amounts.
Investor confidence in Saudi Arabia has been hit this year by up to
$30 billion of debt restructurings at the country's Saad and
Algosaibi groups.
Debt-raising
In another move which the government said was not connected to the
Dubai World restructuring, Dubai raised a further $6.9 billion as
part of a $27 billion bond programme launched this year.
The $6.9 billion was half of what it had previously said it
would raise.
The $6.9 billion tranche, with a maturity of five years and paying
four percent interest, was placed with two Abu Dhabi-controlled
banks, National Bank of Abu Dhabi and Al Hilal Bank, officials
said.
The first $13 billion tranche in the programme was taken up by the
United Arab Emirates central bank earlier this year as Dubai sought
to raise funds to support state-linked companies.
Economist David Butter at the Economist Intelligence Unit said the
bond was an elegant way for Dubai to avoid going back to the
central bank, owing to the difficulty of attracting interest from
international banks.
"Dubai will be able to state that it has raised what it needs from
the market, without any suggestion of an Abu Dhabi bailout," he
said.
Dubai has said previously that proceeds from its bond scheme will
underpin companies such as Nakheel, as part of its drive to build
tourism as an alternative to dwindling oil reserves.
But few details have been disclosed about what Dubai has done with
the initial $13 billion and how it plans to use the latest $6.9
billion.
"Any news from the financial stability fund has been absent since
it has been launched," said economist Caroline Grady at Deutsche
Bank.
"We haven't heard anything other than the headline in May that some
of the money was used to refinance debt at Nakheel."
