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.