Stop the Dubai World, I want to get off
At long last, Dubai has admitted what has been obvious to everyone else for months: it can’t pay its debts.
This painful admission of reality, the signal to Dubai World’s creditors that they won’t see any of their money until at least next May, pulls the magic carpet out from under companies investors had thought would not default.
The straw that broke the Dubai camel’s back is a $3.5 billion sukuk bond. It had been due to be repaid on December 14. It won’t be.
The government’s argument will be scant comfort to bondholders. The plan is to restructure the emirate’s flagship firm and its sprawling portfolio, which includes plum assets like ports operator DP World, as well as a few dogs like the bizarre Palm developments built in the sea off the Dubai coast.
The task of unpicking this web falls to Deloitte partner Aidan Birkett. Sheikh Mohammed bin Rashid al Maktoum, Dubai’s ruler, may find himself making up the rules as Birkett goes along, since nothing as remotely embarrassing has been seen in Dubai before.
He will have his work cut out, and the indication that he can do this by next May looks like wishful thinking. Dubai World’s debts total $59 billion, including the borrowings of its Palm-owning subsidiary, Nakheel.
Dubai’s own restructuring is only just beginning. Some estimates put the emirate’s total external debts at almost $80 billion, money spent to finance its extravagant attempt to build a financial metropolis in the Gulf desert.
Dubai was already struggling to find external sources of new finance. Wednesday’s shock news will effectively close the markets, leaving it dependent on its petrodollar-rich neighbour Abu Dhabi. Abu Dhabi has already stumped up $10 billion. Only hours earlier on Wednesday, two of its banks had subscibed $5 billion for new bonds. Presumably, they did so in the knowledge of what was about to happen.
Investors are finding out the hard way about the risks of buying into a city state built on shifting sand that is not underpinned by oil. Dubai’s lot now rests entirely on the firmer foundations of its neighbours.