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Implications of Dubai's Debt Troubles

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Implications of Dubai's Debt Troubles Implications of Dubai’s Debt Troubles (December 2009) Implications of Dubai’s Debt Troubles GRC Report December 2009 Eckart Woertz Program Manager Economics at GRC Implications of Dubai’s Debt Troubles Implications of Dubai’s Debt Troubles Eckart Woertz Introduction about the consolidated gross debt of the government and the companies it owns is The debt standstill request for the not published. One has to rely on private government-owned companies Dubai World estimates, which range between $80 and and Nakheel marks a watershed event in the $100 billion of debt in the form of bonds economic development of Dubai. Before this, and syndicated loans for which information markets had assumed an implicit government is available in the public domain. In the guarantee for such companies; now that meantime, Moody’s assumes a debt load at such guarantee has not materialized and the upper end of that range at $100 billion. Abu Dhabi has so far failed to show up for There is no public data about bilateral bank the rescue in these two cases, refinancing on loans; if estimates on these are included the international markets will be more expensive number grows further and could be as high or impossible. Matching increased costs as $120-$150 billion, as an economist of of capital with growing economic activity EFG Hermes has opined. The wide range of will be challenging in the prevailing global estimates reveals considerable uncertainty; environment. Therefore, reliance on Abu given Dubai’s GDP of $82 billion, the debt Dhabi in the ongoing restructuring process load represents between 100 and nearly will increase and will come with trade-offs. A 200 percent of GDP, depending on the possible outcome will be greater centralization estimate, which is in any case substantial. of the UAE and a recalibration of Dubai’s If the lower end of $80 billion is taken, it development strategy. While the real estate represents 9 times the Dubai government’s sector is still troubled and has failed to deliver 2008 revenues and has the potential to on its lofty promises, Dubai has reached severely stress fiscal abilities. critical mass as a regional trading hub and The restructuring of Dubai World (DW) can build on this strength. will only apply to a fraction of this debt and only to the holding company and two of Dubai’s Debt Structure: How its subsidiaries. Dubai Ports World (DPW) Bad Is It? and Jebel Ali Free Zone (JAFZ) have been exempted from the restructuring which Transparency is missing when it is limited to the real estate subsidiaries comes to Dubai’s debt situation. Data Nakheel and Limitless. DPW and JAFZ 3 Implications of Dubai’s Debt Troubles have viable business models with ongoing borrowed much additional funds since its last cash flows and have benefited from the balance sheet date (December 31, 2008). recovery in international freight rates since With regard to the overall debt load March 2009. They are seen quite favorably of Dubai, two factors are worrisome: First, by analysts; not everything in Dubai is the maturity profile of outstanding debts is as apocalyptic as a cursory glance at very short term. Over the next three years, newspaper headlines sometimes seems to $50 billion of debts are due, $12-$13 suggest. JAFZ has actually paid a coupon billion in 2010 and a staggering $25 billion in time only a few days after the standstill in 2011 alone. Dubai will need to refinance request of its parent company. That the this debt at significantly higher costs, DW subsidiaries Istithmar World and as markets have dropped their implicit Infinity World have been exempted from government assumption. Secondly, there the restructuring as well have come as a is a substantial amount of bad debt, which surprise to many as these companies have is not backed anymore by viable assets engaged in leveraged and ill-fated foreign or business models. Moody’s estimates investments that can be hardly regarded as that this bad debt amounts to $25 billion. the core business of DW (e.g. MGM Mirage Eventually someone will need to take this Casino Las Vegas or Barney’s New York). loss in a bailout or a restructuring. The Dubai World’s liabilities amount to a bargaining on who that will be has arguably widely quoted $59 billion. However, this begun with DW’s standstill request. figure refers to liabilities, not only debt instruments but also unpaid contractor How Refinancing Conditions bills or land grants, according to Deutsche will Change Bank. The amount of debt proper has been estimated to be $22-$24 billion and on the Dubai has always been proud to be a eve of further announcements Barclay’s state that is run like a corporation. Given assumed that $18 billion of this amount the lack of a tax base and the small share would be part of the restructuring process. (11 percent) of government spending in the After a nerve-wracking weekend without overall Dubai GDP, one could in fact argue detailed information, DW finally specified that the state is its corporations and is as that a higher amount of $26 billion of debt much in trouble as them if they are in dire will be restructured. straits. The market discounted this; with Based on information in the public the breakout of the global financial crisis, domain, Barclay’s identifies ca. $16 billion its assumption of an implicit government of debt at the three entities that are up guarantee relied increasingly on Abu Dhabi’s for restructuring: $8.5 billion at Nakheel willingness to help Dubai out if need be. (including local currency debt), $5.5 billion This view seemed to be vindicated by Abu at Dubai World holding company and $1.2 Dhabi’s actions. Earlier this year it helped to billion at Limitless. This leaves ca. $10 billion refinance struggling Borse Dubai and via the of debt for which no public information exists Central Bank it provided liquidity support of and which most likely consist of private Dh120bn ($32bn) to the UAE’s banks. Most bilateral loans at Dubai World or Limitless, notably, it purchased a $10 billion bond as Barclay’s assumes that Nakheel has not issued by Dubai under a $20 billion bond 4 Implications of Dubai’s Debt Troubles program in March 2009. The unsecured five- The handling of the standstill request year bond formally had no strings attached thus far has revealed lack of professionalism and its very preferential rate of 4 percent and has done little to inspire the confidence would have never been achievable for Dubai of markets. The announcement was scant in on the free market at that time. detail and was made before major holidays Dubai executives encouraged the in the Muslim World (Eid) and the US market’s view of an implicit government (Thanksgiving). Only two hours before, two guarantee by self-confident statements, and government-related Abu Dhabi banks had the market continued to treat companies released $5 billion for the Dubai Economic owned by the government (e.g Dubai World) Support fund, which had been awaited as or the ruling family (e.g. Dubai Holding) as part of a second $10 billion tranche of the “quasi-sovereign” proxies for the credit bailout program. Investors who banked on quality of the Dubai government, which itself this statement and added to their positions has only issued few debts of $3.7 billion in in the Nakheel bond were naturally not dollar and local currency and does not have amused to see more than 30 percent of their a credit rating. investment evaporate only two hours later. The first signs of retreat appeared in The exemption of DPW and JAFZ from the October, when the Dubai government was restructuring process was only announced able to tap international debt markets for later and, in the meanwhile, investors were the first time in a year, raising $2 billion in an left with the rumor mill and statements Islamic bond issue. In the bond prospectus by non-DW executives who revealed no it distanced itself from its corporations by further details. Instead they preferred to denying an explicit government guarantee shoot the messenger by blaming the press in order to look more attractive for investors and analysts. From a city that has aspired in its new bond. This prompted Moody’s to to become a regional if not international downgrade five of the six Dubai government- financial center by aspiring to best practices, related companies it is currently rating, even markets had expected otherwise. before the recent standstill request. As the implicit government guarantee Effect on Dubai Companies has disappeared, markets will need to value and Their Credit Risk Dubai’s government-owned companies on a stand-alone basis. However, this is Apart from the problems at DW, severely compromised, if not impossible, markets wonder whether credit risk may given the lack of transparency and data. materialize at other Dubai companies. Real Before the standstill request, Moody’s gave estate companies have been at the heart Dubai companies investment grade rating of DW’s debt problems and have the most only because of the implicit government pressing need for restructuring as the guarantee, which in turn was tied to Abu planned merger of Emaar with real estate Dhabi’s support waiting in the background. companies of Dubai Holding (Tatweer, With the exception of DPW, it regarded all Sama, Dubai Properties Group) has shown. of them (DEWA, DIFC Inv., Dubai Holding, A merger of the two real estate financers JAFZ, Emaar) as speculative grade on a Tamweel and Amlak under the umbrella of stand-alone basis.
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