Dubai must recover investor faith
Some kind of debt restructuring was inevitable for Dubai’s myriad overleveraged borrowers, but the emirate’s decision not to support property developer Nakheel and seek a debt standstill for holding company Dubai World has devastated its standing in financial markets. Dubai’s future and ability to attract much-needed external capital will depend on how it handles the fallout.
It is rare to see a company announce plans to launch a bond on the same day it threatens creditors to one of its main businesses with potential default. That’s what Dubai just did, when it asked creditors of flagship holding company Dubai World and property developer Nakheel, owned by Dubai World, for a debt standstill until next May on the same day it announced plans to sell a bond for its electricity and water authority.
This muddle suggests Dubai has underestimated how much international markets’ view of its own standing would be contaminated by the standstill. Yesterday’s bombshell followed weeks of rapprochement between Dubai and international markets, culminating in the government’s recent sale of an Islamic-compliant bond. That goodwill is now lost.
Supporting property developer Nakheel may have been unpalatable, but the way the news was announced — on the eve of the Eid holiday — is hugely damaging for other government-related entities and Dubai itself.
Dubai and its related companies have about $90 billion of debt, of which $20 billion falls due over the next year, according to Barclays Capital estimates. All of Dubai’s entities will be tarnished. That is why DP World, the profitable port operator, quickly moved to assure creditors that it was not subject to the standstill.
Much depends on how the big banks that have lent to Dubai and its various entities now respond. If they withdraw credit lines and demand repayment on outstanding debt, the whole leveraged edifice could collapse.
Dubai risks suffering the payback from the financial engineering it used to grow so quickly during the boom times. By allowing the boundaries to be blurred between an ordinary corporate and a government-backed entity, the emirate will now find it harder to contain the fallout from a high-profile failure.
A lot depends on how Dubai handles the debt negotiations over the next few months.
Given its limited natural resources compared to stronger neighbor Abu Dhabi, Dubai can’t afford to ignore international investors’ interests or prioritize local lenders.
The restructuring will be complex. It may involve untangling cross-holdings between Dubai’s World’s different companies and other entities owned by Dubai’s other holding companies.
Dubai needs to tread carefully. It can rely to some extent on Abu Dhabi for now, but needs to ensure it can continue to attract enough external capital in the long run. Presenting creditors with a fair restructuring proposal for Nakheel and Dubai World debt would be a good start.