Dubai can’t rely on friendly creditors

November 30, 2009

NeilUnmack.jpg– Neil Unmack is a Reuters columnist. The opinions expressed are his own –

Whether a “careful plan” or strategic blunder, Dubai’s request for a debt standstill for its Dubai World holding company has rattled lenders who were counting on government support.

It will now struggle to contain the fallout for other Dubai-owned entities.

In the case of Dubai World, banks and other creditors have the option of rejecting the standstill and trying to enforce security over the holding company’s assets — which include the QE2 cruise liner and port operator DP World. But the legal process will be drawn out and recovery values unpredictable.
International creditors may struggle to persuade local banks to reject the standstill.

That would suggest an out of court restructuring is more likely, and that banks will push for the best terms they can get.

Much will depend on how the proposed standstill is structured, which is still not certain. Lenders may be unwilling to sign to an agreement that forces them to defer interest, because that would make it more likely that they will have to take additional bad debt provisions before the end of the year.

But while the banks may be prepared to take some pain or extend their debt, they will want something in return from Dubai and its wealthier neighbours. It’s not clear, however, how much Abu Dhabi is prepared to give to Dubai’s creditors.

The standstill is important because it affects much more than just Dubai World. It raises questions about Dubai’s willingness to support other businesses it controls. More broadly, it has upped the stakes for the United Arab Emirates as a whole. Bond issues have already been canceled. That could compel the UAE states to stump up more to limit the wider damage.

The threat of wider fallout potentially gives creditors a stronger hand in discussions. However, the creditors themselves are not a homogenous group. They include bond holders, large banks, and funds that have bought bank debt at distressed levels. They will have different exposures, bought at different prices.

Banks with large exposures and business interests in the region will have an incentive to seek as tidy a solution as possible. But the risk is that some smaller lenders act ahead of the others, refusing to roll over debt or seeking to call in loans. That could spark a rush for the exit, as banks seek to recover as much as they can from a range of Dubai companies. Dubai’s handling of the crisis so far has greatly increased that risk.

17 comments

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A true arab way of life. When business is doing ok, they divert funds from it to their owners a/c. They call it as “milking” when business goes bad, they just wash hands off. Not my problem….

Posted by mess up | Report as abusive

UAE law does not allow a businessman to ask for any relief if his cheque bounces. Why this law is not applied to big Fish?

Posted by Mandev | Report as abusive

Quote from previous comment:”November 30th, 2009 3:38 pm GMT – Posted by mess upA true arab way of life. When business is doing ok, they divert funds from it to their owners a/c. They call it as “milking” when business goes bad, they just wash hands off. Not my problem….”Aside from the fact that it is utterly unsubstantiated, this is plainly racist and should not be acceptable commentary on a Reuters site.

Posted by Bassem | Report as abusive

Are there such words as “friendly creditors”?I thought creditors only recognize money as friends.

GDP comes with a price to its creditors. enjoy your new cities…

Who would want to invest in Dubai, buy real estate or go for a holiday. The airport for starters has to be the worst in the world. In the city the men are rude and always gawking at western women. Property Value Decline: Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have fallen 50% since August 2008, and could fall a further 15%-20% this year. Real estate and construction accounts for about 23% of Dubai’s gross domestic product, or the value of all goods and services produced.If you invested in Dubai and lost you money “Typical”.

Posted by Jon Frodsham | Report as abusive

One cannot understand the effrontery of the Dubai Finance Ministry stating that the Dubai Government is not reponsible for the Dubai World debt. They are the sole owner. One also wonders the gullibility of the Lenders who were misled to believe that the Dubai Government was responible fo the debt. If a sensible solution is not reached soon, the financial credibility of Dubai and Dubai World will be seriously impaired, perhaps frever.

Posted by Terence Wilding, Bond Engineer | Report as abusive

@mess upWhat does all this have to do with being Arab? The real experts at pocketing the profits when business is good and washing their hands off the losses when things go bad, are the bankers of New York, London, Paris etc and they are certainly not Arabs!emk

Posted by emk | Report as abusive

One cannot understand the effrontery…One also wonders the gullibility of…You do realize that those are completely contradictory, right? If it is so unseemly for the Government of Dubai to disclaim responsibility for DW, that implies that the lenders were reasonable in relying on an implicit parental guarantee. If the lenders were indeed “gullible” in such reliance, then the Government is simply being business-like.It is possible to hold either of the opinions you express – but it is not possible to hold them simultaneously.

Posted by dcardno | Report as abusive

I’m an expat in Dubai. It’s scary the way local papers are blaming the “greedy Western banks”. Letters to the editor suggest that the emirate refuse to pay back banks from Great Britain and the US. As if it is all our fault.

Posted by Anna | Report as abusive

dubai has oil and wont stand to lose anything by itsame goes for brunei and malaysiaall the best

Posted by benjamin | Report as abusive

I wonder what the pull out of troops from Iraq has had on them? Now that the US and Britain are pulling or pulled out we don’t need them as a shipping port.

Posted by Jmaximus | Report as abusive

Could not agree more with Jon Frodshan!Bravo!I’ve been in UAE and Dubai/Sharga/Abu Dabi hundreds of times during mid 90s.Just for fun or business -OK ,but no more than 3-days.But who would invest or buy property down there.. I really don’t know …maybe an idiot.First of all ,for those ,who have slightest idea what this microscopic country is.. there,YOU ARE nobody!!!You are not protected by their law …not talking about their habits way of life,religion etc. etc.fOR EXAMPLE READ THE POST of Terence Wilding.Bravo again .I’m glad we have the point to open smb’s eyes on that country

Posted by Boris | Report as abusive

Dubai gov’nt officials must have been thinking ‘Oh let’s build the biggest, grandest, tallest, most expensive properties in the world… Oh wait we have no one who’s going to rent the property, oops!!’

Posted by Indra | Report as abusive

Having lived and worked in Dubai for over 20 years, I agree totally with the comments made by ‘mess up’. However, I don’t believe that Dubai’s ruler makes totally autonomous decisions on economic development. He must have a whole department run by an appointed government minister to advise on both short and long-term economic development for the Emirate as a whole. Where are the comments on their contribution to the current crisis? Why not put the responsibility firmly in the hands of the inflated egos that enable these ‘Mickey Mouse’ schemes to see the light of day in the first place.

Posted by mike scott | Report as abusive

With all the Dubai bashing that has been occurring over the last few weeks, people have lost sight of the fact that the debt overload was not one-sided. The commercial banks were happily and greedily lining up to lend Dubai all of the funds as well. All of the $58 billion or so loans made to Dubai World were done so without any government guarantee, so why are the banks and investors upset that the government will not bail them out? When things were going well in Dubai over the last few years, were these banks sharing their record profits with the government?

All of the loans that were made were done so on commercial terms. The credit guys at the banks reviewed the financials, and indpendantly decided that each of the Dubai companies was worthy of massive amounts of credit. As such, these same credit analysts are to blame for the losses that their banks will incur.

Posted by TorontoGuy | Report as abusive

Kiranintl is a famous IT software companies in Dubai. Now a days performance of Dubai IT Companies is an upward direction.

Posted by Dvidhjun | Report as abusive