Financial Regulatory Forum

Abu Dhabi throws Dubai a $10 billion lifeline, terms unclear

December 14, 2009

   (Adds background, paragraph 16)
   By Amran Abocar and Rachna Uppal
   DUBAI, Dec 14 (Reuters) – Abu Dhabi threw its flashy but debt-laden neighbour Dubai a $10 billion lifeline to head off a bond default, cheering Gulf and global markets on Monday but raising questions about the undisclosed terms.
   The surprise rescue enables Dubai World to repay a $4.1 billion Islamic bond its property developer unit Nakheel was due to honour on Monday.
   The cost of insuring Dubai’s debt against default fell sharply on the news, and the stock market in the glitzy emirate rose 10.4 percent, its biggest one-day gain in 14 months.
   Shares in Abu Dhabi, Saudi Arabia and Qatar also recovered on relief an immediate crisis had been averted. 
   Dubai World rocked global markets on Nov. 25 when it asked creditors for a standstill on $26 billion in debt mainly linked to its two property firms, Nakheel and Limitless World.
   The bailout marked a spectacular double policy shift. Dubai last month declined responsibility for Dubai World’s debts, and conservative Abu Dhabi, which produces 90 percent of the United Arab Emirates’ oil exports, had given no hint that it would ride to the flamboyant business hub’s rescue.
   However, credit ratings agency Fitch Ratings said Abu Dhabi’s support was only “a tactical step to permit an orderly restructuring of obligations within Dubai to continue.” 
   A Dubai government statement said the remaining $5.9 billion not used to pay the Nakheel bondholders would support Dubai World until the end of April next year.
   But the conglomerate at the centre of a $26 billion debt storm still needs creditors to agree a standstill, and a massive restructuring, in order to get financial support to cover working capital and interest expenses. 
   Statements from Nakheel and the Dubai government indicated the Nakheel bondholders would be paid unconditionally. However a Dubai government source made clear other lenders would only receive interest payments if they agreed to the debt standstill.
   Analysts said the emirate’s troubles were far from over. They questioned a statement by a Dubai government source that there were no conditions on the loan beyond the debt standstill.
   “We’ve still got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing,” said Saud Masud at UBS. “The big question is how are they are going to do this next step?”
  
   LOAN OR GRANT?
   Loans worth a total $3.7 billion to DW unit Limitless World and to Borse Dubai, 60 percent owned by state-owned Investment Corp. of Dubai, fall due before the April timeline. 
    Separately, a Japanese government study showed the Dubai government and affiliated firms owe non-financial Japanese companies roughly $7.5 billion in credit that had not been collected as of Oct. 31.
   Neither emirate made clear whether the bailout was a loan or a grant.
   The Dubai government source, who would not give his name, told journalists on a telephone conference call there was “no conditionality”. He also said the terms were “internal” to the governments involved.
   Among issues on which Abu Dhabi might seek concessions are Dubai’s trade with Iran, the future of its Emirates airline, and its freewheeling nightlife in a conservative Muslim region.
   Analysts say Abu Dhabi and Washington have pressured Dubai to take a tougher line on Iran, one of its main trade partners.
   Upping pressure for a debt restructuring, Dubai announced it would implement immediately an insolvency law modeled on U.S. and British practices in the event Dubai World needs to seek protection from its creditors.
   A government statement said this was necessary because Dubai World’s existing structure did not allow it to seek protection from creditors. 
   “This is kind of above and beyond what people expected. It is a crucial and essential lifeline,” said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole in Riyadh. “That should bring in a lot of confidence. Basically Abu Dhabi is footing the bill.
   “I highly doubt this kind of money has no strings attached. There was no other choice for Abu Dhabi but to bail out Dubai. The (United Arab Emirates) federation would have been at stake.”
   The price of Nakheel’s $750 mln January 2011 bond leapt to 64/68 cents in the dollar from Friday’s close of 40. London traders said prices were not longer being quoted for the larger $3.52 billion bond that was due Monday, and which traded below 50 last week. The U.S. dollar jumped against the yen, while Asian stock markets rebounded. U.S. S&P stock futures jumped 0.7 percent, reversing early losses, and European shares were also higher.
  
   ASSET SALES
   Speaking on a telephone conference call in which his identity was not disclosed to reporters, the Dubai government source said the restructuring process could include asset sales, but they would be confined to Nakheel and Limitless, excluding Istithmar World assets, which owns U.S. luxury retailer Barneys, or port operator DP World.
   The property unit’s assets included man-made islands shaped like palms and a map of the world in Dubai, as well as mixed-use real estate projects in Indonesia and Malaysia.  
   The UAE central bank said it would back local banks who have exposure to Dubai World. Dubai World said it would continue to work with creditors to negotiate a standstill in an orderly way. 
   Dubai’s creditors include London-listed Standard Chartered, HSBC, Lloyds and Royal Bank of Scotland, along with United Arab Emirates lenders Abu Dhabi Commercial Bank and Emirates NBD.
 (Additional reporting by John Irish, Thomas Atkins, Inal Ersan, Nicolas Parasie, Rachna Uppal, Jason Benham, Martina Fuchs, Luke Pachymuthu and Rania Oteify; Writing by Amran Abocar and Paul Taylor; Editing by Andrew Hay) 
 ((amran.abocar@thomsonreuters.com; +971 4 391 8301; Reuters Messaging: amran.abocar.reuters.com@reuters.net))

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