Dubai must recover investor faith

November 26, 2009

BRITAIN/— Neil Unmack is a Reuters columnist. The opinions expressed are his own —

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.


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The muslim world must support regional investment in Dubai

Posted by Clurk Vellsun | Report as abusive

Dubai had debtors prison! Will they actually arrest anyone over this massive fraud?How about this, discount all those overpriced villas 90%, amend the laws so that the expats (who make up 90% of the population) actually have some legal representation and rights? Then maybe, just maybe Dubai will have a chance to recover. Otherwise they will just continue to be the glorified fiefdom they are now…albeit a much quieter one with no traffic jams.

Posted by Nick | Report as abusive

Neil its right but according to some pundits, the outstanding debts may even go beyond $90 Billion dollars.Many global banks, companies and small entities having bussiness links with Dubai World and Nakeel projects are bound to suffer from these crisis. Fears are running in the veins and nerves among the huge expat communities about the foreclosures, credits, pay cuts, job losses or cuts in future.During Nimrod’s bibical era languages were altered leading to mass migration but now the “Numerical Code” has busted.

Posted by Peter Vaz | Report as abusive

By not honoring debts, this Dubai empire loses nothing but credibility and goodwill which are worth most. Banks write off once, the empire is written off for good.

Posted by Purvez | Report as abusive

Many investors still remember how Russia defaulted on its bonds.Dubai is another reminder that seemingly secured and risk-free asset is not literally risk free. The government of Dubai has to learn to keep its political power in check. The international financial world has its own rules and regulations, a government cannot just “asked” for a debt standstill without hurting the reputation of the whole country.

Posted by scheng1 | Report as abusive

Wondering how much impact this will have on the global markets. How unthoughtful of a government not to look into the implications of such restructuring.

Posted by Nripen Mathew | Report as abusive

It is indeed a worry. Nothing too serious as yet though concern is steadly mounting…… hmmm

Posted by Peter Schwarz | Report as abusive

No one can be that surprised. Dubai is the textbook definition of a property bubble. All these playgrounds for the rich have been fueled by fairy dust.

Posted by John Haythornthwaite | Report as abusive

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Posted by The Great Debate » Debate Archive » Dubai must recover investor … | Dubai for Visitors | Report as abusive

I read about how countries and businesses must restore confidence. Hey, investors have to look at what they are investing in before putting up their money. Sitting behind a poker player and passing him money to bet with is pretty stupid. The poker player can spin you all sorts of yarns at how good he is. I do think banks and investors need to check out the property before putting money up.

Posted by f belz | Report as abusive

The world of high finance and high fashion are not such strange bedfellows, but recession or no recession where are the rich and hyper-rich to buy these properties in the first place? What has this place got to offer me that Spain hasn’t got? A place airlines could take me for pennies? A few amazing buildings, but is the budget customer going to go twice? The good news is that those that want a bolt-hole (and have the money) will be getting massive discounts.

Posted by Peter Hayes | Report as abusive

I invested all my savings in the UAE to start a business six years ago which has gone bust as the banks withdrew their credit lines due to this crisis. I am now considered a criminal in the UAE as I owe money to the financial institutions. There are several such self employed expatriates in the UAE who have lost it all due to this crisis. What amazes me is that the lawyers who we approached have advised us to go to jail rather than to help us fight this issue in court. We don’t even have the opportunity to roam freely in the UAE and try to earn through alternative means. Someone should fight our cause.

Posted by Sufi Dost | Report as abusive

Clark Vellsun says: “The muslim world must support regional investment in Dubai”Why? The digusting show of opulence (built on debt) was hardly designed to cater for the needs of the muslim world, many of whom still live in abject poverty.Dubai is all about bling without any substance. But beneath the ediface of wealth are millions of poor workers from South Asia (including many muslims) who built the city on poverty wages and under Victorian standards of health and safety and welfare.The Sheikhs thought by building the tallest buildings, creating 7 star hotels and turning a blind eye to exploitation and prostitution they had created some 20th century utopia.Well not quite, I for one am glad it is all crumbling.

Posted by Haroon Abbasi | Report as abusive

Most commentators don’t understand the culture thus they worry, Abu Dhabi and GCC countries will not allow Dubai to go down so as not to set a precedent, in that culture familis bail-out members and same with countries. Have no worry

Posted by ghost11 | Report as abusive

Most commentators don’t understand the culture so they worry to death, Abu Dhabi and other GCC countries will not allow Dubai to lose face and credibility, it is about leadership, ordinary families bail-out their kin and this will be the same but here the fraternity is the leaders and they are joined at the hip, Relax

Posted by ghost11 | Report as abusive