Implications of ’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 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. 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 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

 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 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

 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. ) 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 and Amlak under the umbrella of stand-alone basis. the Abu Dhabi-based Real Estate Bank and

 Implications of Dubai’s Debt Troubles

the Industrial Bank (EIB) is already At the beginning of the year, research pending since late 2008. While DH also has by investment banks estimated that there a pronounced exposure to the Dubai real would be a significant population decline estate market, the maturity profile of its debt of 8 percent (UBS) to 17 percent (EFG spreads out until 2017 and is a less pressing Hermes) in 2009. However, official figures issue compared to the decidedly short term by the federal Ministry of Economy have payment schedule of Dubai companies on maintained a population increase in 2009 average. Still, its credit default swaps rose of 6.3 percent on the UAE level and of the most (146 percent) of all Dubai entities even 7.8 percent in Dubai, mainly due to in the immediate wake of DW’s standstill migration. Dubai is certainly not a ghost announcement and it must be regarded town as some media reports seem to as the most vulnerable, also because want us to believe and the mass exodus of leveraged foreign investments by its of expatriates that some have expected did subsidiary Dubai International Capital. not materialize, although traffic congestion Pressure on the Dubai real estate has eased visibly. Still, it is difficult to market will continue, especially in less see where the alleged newcomers have attractive areas. Price recoveries in the supposedly found work, given the obvious third quarter were not fundamentally decrease in construction activity and the underpinned but rather a technical reaction layoffs of white collar expatriates in the real to massive losses of about 50 percent since estate, finance and media industries. Given the price peak in summer 2008. Especially the varying estimates and figures, suffice to in commercial real estate, a high level of say that population figures can be politically inventories weighs on the market, while sensitive and that the officially alleged a simple counting of lights in apartment increase in Dubai’s population in 2009 buildings at night reveals low occupancy was not enough to ward off a significant rates. Foreign investment demand was deterioration of its real estate market. crucial for the erstwhile real estate boom, Compared to the ailing real estate but it has already faded away because of sector, companies with ongoing cash flows the global financial crisis and with the lost and established business models are more trust in the wake of the DW debt affair, it resilient. In international comparison, DPW, will be even more difficult to attract. UBS ’s fourth largest port operator, estimates that it will be difficult to raise has fared sufficiently well. It may only face the additional finance of $11 billion for an a slightly negative revenue growth and estimated 40,000 unfinished flats as half its maturity profile stretches out as far as of the investors will likely default by the 2037. The preliminary economic recovery end of 2010. As trust in developers has since March 2009 has helped a lot of Dubai fallen and prices in the secondary market companies with an internationally diversified are below initial purchasing prices, there risk exposure: JAFZ, DPW and Emirates is an incentive for investors to walk away Airline benefitted from recovering trade and from ongoing projects, even if this means freight rates, while Dubai Aluminum (DUBAL), forfeiting earlier down payments. Overall, which contributes around 7 percent to Dubai UBS expects real estate prices to decline a GDP was helped by improving aluminum further 30 percent in 2010. prices after the steep correction in commodity

 Implications of Dubai’s Debt Troubles

prices in the second half of 2008. Many of the water desalination capacity in order to keep more viable companies are organized under pace with the city’s rapid growth, and such the umbrella of the Investment Corporation of capacity expansion is now cheaper to buy. Dubai (ICD), which is increasingly emerging DEWA was even able to refinance $2.2 billion as Dubai’s “good bank” of assets according at the height of the global financial crisis in to the Financial Times. April 2009. Only days after the standstill Established free zones such as Media request last week, DEWA appointed Citigroup City and Internet City, which are run by DH- and Bank on November owned Tecom, have a relatively stable base 30 to arrange a bond issue of up to $2 billion of long term tenants. In comparison, newer in the first quarter of 2010. DEWA did not economic cities such as Silicon Oasis or disclose for what it would need the bond, but DuBiotech, the Dubai Biotechnology and its offering will be an interesting litmus test Research Park, will be less resilient as they of how the market views an explicit Dubai are in an earlier stage of development and government guarantee, now that the implicit have less obvious competitive advantages, guarantee is gone. particularly with regard to available qualified The effect on banks in the UAE is human resources. difficult to gauge, as most of their exposure DIFC might also be in a less advantaged is likely to be in bilateral loans that are not position. The financial sector has been in the public domain. National Bank of Abu particularly hit by the global crisis, and Dhabi (NBAD) is the only UAE bank that has Dubai’s image as a financial hub has been made an official announcement about its severely tarnished by the DW debt saga. aggregate exposure to Dubai World. It has Regional competitors like and Qatar put it at $345 million, which would be rather may be able to use this to their advantage. modest and double its non-performing loan Abu Dhabi has financial ambitions of its own ratio to only to 2 percent in case of default. with a planned financial city on Sowwah Standard Chartered points out that “in the island, and it aspired to host the Central absence of detailed disclosure from the Bank of the planned GCC currency union banks, the large exposure limit set by the before withdrawing from the project when Central Bank of the UAE (25% of the bank’s the seat went to Riyadh. With Saudi Arabia’s capital to commercial public sector entities)” accession to the WTO, the GCC’s largest can be taken as “a better indication of what economy is also in a better position to the ‘worst case’ maximum exposure to Dubai realize ambitions in the financial field, which World and Nakheel could be for each bank.” it has formulated with the project of the King As there is no aggregation of exposure to Abdullah Financial District in Riyadh. different legal entities, banks could treat The Dubai Electricity and Water DW and Nakheel as two different entities, Authority (DEWA) is the only government- which could theoretically increase aggregate owned company whose debt has an explicit exposure to 50 percent in the worst case government guarantee. As a utility provider, it scenario. Based on this methodology, and has a more stable business model by nature by comparing the capital of UAE banks with and might actually profit from the economic their total outstanding loan volume, Standard downturn. It has been under immense Chartered arrives at a maximum exposure of pressure to increase power generation and $13.4 billion of UAE banks in a worst case

 Implications of Dubai’s Debt Troubles

scenario, which would increase their NPL any speculation about possible bank runs. ratio to 10-16 percent (with the exception of NBAD which has declared its exposure and Risk of Regional and in its case this ratio would be 2 percent). International Contagion?

Standard Chartered’s Worst Case Scenario Markets initially feared substantial risk of contagion on a regional and even Estimated Worst Case NPL ratio international level. Credit default swaps of worst case NPL ratio June 09 exposure ($ bn) in % in % other GCC countries rose as well, albeit Emirates NBD 4.4 9.7 1.5 they were less pronounced than the ones NBAD 0.3* 2.0 1.1 of Dubai, and international equity markets ADCB 2.7 12.8 4.2 tumbled as they feared that Dubai could First Gulf Bank 3.0 13.4 1.1 spark a crisis of emerging market debt in UNB 1.4 11.6 1.3 general. Mashreqbank 1.6 15.7 2.2

Source: Standard Chartered, “Dubai World – Impact on the Market Reaction to DW Standstill Request: UAE Banks,” Credit Research, December 1, 2009. NPL= Non Spreads of Credit Default Swaps (CDS) Performing Loan 5y CDS 5y CDS Relative *has been officially declared Nov. 23 Nov. 27 change in % Dubai Holding 670 1650 146% Citing unnamed banking sources, an Emirates Bank 345 800 132% AFP story on November 29 put exposure of Dubai 317 630 99% Abu Dhabi and Dubai banks to DW between DP World 355 700 97% 30 and 40 percent of banks’ capital, with NBAD 135 250 85% Abu Dhabi Commercial Bank (ADCB) Abu Dhabi 100 175 75% having exposure between $2.18 and $2.45 Mubadala 133 225 69% billion and First Gulf Bank of $1.36 billion. ADCB 210 305 45% In the case of ADCB, this would be pretty Bahrain 175 225 29% close to Standard Chartered’s worst case Qatar 94 120 28% scenario in the table above. Russia 191 215 13% While this certainly would affect the Hungary 217 242 12% BarCap USD GCC 237 302 27% profit quality at banks and might even make bonds index their bondholders nervous, it has to be BarCap USD EM 315 323 3% stressed that there is a three year guarantee Sovereign Index by the UAE government on bank deposits Source: Barclay’s Capital, “Dubai’s Debt – Whose Problem is since October 2008. The guarantee was It?” Emerging Market Research, November 30, 2009. implemented in the wake of the global financial crisis and extends to all national Such fears say more about the still fragile and international banks with “significant nature of global financial markets than about operations,” excluding regional and Iranian the contagion potential of Dubai, which is banks. The UAE Central Bank has also made limited. Neighboring countries with significant additional liquidity facilities available to UAE oil revenues and foreign reserves have a very banks to underscore this guarantee and quell different economic structure from Dubai.

 Implications of Dubai’s Debt Troubles

Saudi Arabia actually has one of the lowest Abu Dhabi’s Role and the levels of government debt in the world with a Growing Centralization of the share of only 13.4 percent of GDP, as Bank UAE Saudi Fransi points out. This is a number other countries can only dream of; the US is at 50 As Dubai’s access to international percent and rising and India is at 81 percent, capital markets has diminished, it will need not to mention countries like Italy or Japan. to rely increasingly on Abu Dhabi besides The real estate bubble of Dubai has also been making necessary restructuring moves. unique in the region – many neighbors started Despite its support on numerous occasions to copy it, but in hindsight they were lucky to earlier this year, Abu Dhabi has not been be late. There is certainly exposure by GCC ready to lend its helping hand to DW and investors to Dubai investments, but a full Nakheel for the time being. An unnamed fledged contagion of the Dubai debt crisis is senior Abu Dhabi official told Reuters that unlikely, also because oil prices have held out Abu Dhabi will support Dubai on “a case pretty well around $75 per barrel. by case basis” and that it will “pick and The lack of potential contagion applies choose” which companies it will support. all the more to international markets. Dubai On November 25, Dubai did not is not comparable to , Brazil or the US receive the full second $10 billion tranche real estate market. It has also not functioned of a $20 billion bond program as originally as counterparty for deals in trillions of dollars expected but only $5 billion and the of OTC derivatives like Lehman Brothers or proceeds of the bond were not supposed AIG. To put it into perspective, one can take to be used for the bailout of Dubai World a look at the magnitude of GDP figures: world and Nakheel, but for other liquidity needs GDP is at $61 trillion, while the GCC GDP is of the emirate that are administered by only $1.1 trillion, and that of the UAE is $228 the Dubai Financial Support Fund (DFSF). billion of which $82 billion accrues to Dubai. The DFSF was founded in July in order to International banks have lent substantial assist Government-Related Entities (GREs) sums in the UAE, but compared to their that are undertaking projects of strategic overall loan volume the exposure should be importance within Dubai. It reports to manageable, as JP Morgan points out. The Dubai's Supreme Fiscal Committee (SFC), largest exposure is with HSBC, Standard but nothing is known about its allocation Chartered, Barclay’s, and RBS/ABN Amro. strategy and priorities so far. Abu Dhabi’s support for Dubai in the Foreign Banks: Exposure to UAE in 2008 current financial crisis is selective and not unconditional. Abu Dhabi shows that it is Outstanding Loans to UAE as % ready to practice tough love and force a Loans in $ bn of Total Group Loans HSBC 17.03 1.8% restructuring of Dubai business entities that Standard Chartered 7.77 4.4% are currently not viable or might not fit into Barclays Bank 3.58 0.4% its own and the UAE’s overall development RBS/ ABN Amro 2.24 0.4% plans. While it remains committed to a BNP Paribas 1.69 0.2% selective bailout, it seems unwilling to foot Source: JP Morgan, “UAE-Exposure at Risk Analysis,” Europe the bill all by itself. It is ready to accept a Equity Research, November 27, 2009 considerable reputation risk for Dubai and

 Implications of Dubai’s Debt Troubles

the UAE as a whole by letting Dubai walk then. The compromise that ensued led to the thin line of debt restructuring and default a greater integration of Dubai into federal and making international investors bear part politics. Besides being Vice President of the of the burden. Speculation about trade-offs UAE, the ruler of Dubai would henceforth is increasingly shifting from rumored secret also be its Prime Minister presiding over buyout arrangements that are impossible to the Council of Ministers – a compromise verify to a power shift to Abu Dhabi within that has proven to be successful and has the federal structure of the UAE. lasted to this day. Still, Dubai continued to Payoffs for Abu Dhabi’s bailout might maintain a local military force that was only rather be on a political level. Abu Dhabi could integrated into the federal Union Defense demand a strengthening of federal authority, Force (UDF) in 1996. while Dubai would need to relinquish While the UAE has shown a tendency certain sovereign rights, such as control of towards more unity, lack of centralization customs, which so far remains on the level has remained an issue even in foreign affairs. of individual emirates. Hints at increased During the Iran-Iraq war of the 1980s, Abu centralization are already discernible, with Dhabi, Ras Al Khaimah, Ajman and Fujairah Abu Dhabi and federal institutions playing supported Iraq, while Dubai, Sharjah and a more visible role in national development Umm Al Quwain leaned more towards Iran, policy and Shaikh Mohammed of Dubai their most important trading partner and increasingly appearing in his role as Prime home country of a large merchant expatriate Minister of the UAE rather than as Ruler of community in these emirates. Operation Dubai. He launched a dedicated website at Desert Storm for the liberation of Kuwait and the beginning of the year that highlights his the US invasion of Afghanistan equally led to prominent role in federal politics. considerable disagreement between different It is important to keep in mind that the emirates. Until 9/11, the UAE was one of the various emirates of the UAE had shown a three states recognizing the Taliban regime strong sense of independence during the besides Pakistan and Saudi Arabia. The Abu genesis of the federation, especially Dubai Dhabi-led anti-Iranian group amongst the and Ras Al Khaimah. In the 1970s, the emirates had favored a “Sunni axis” that also UAE still resembled a confederation than included Taliban-led Afghanistan in order to a federation in many ways and consensus counter perceived “Shi’a expansionism.” about further unification steps had to be Centralized control of customs authority delicately balanced. Individual emirates in exchange for financial help would give were reluctant to cede authority and Abu Dhabi a firmer grip on implementation revenues to a central government that still of sanctions policies against Iran, which has had to assert itself amidst tribal allegiances been repeatedly demanded by the US in and unresolved border issues. the past. Such a move would also be in line In 1979, a proposal by Abu Dhabi to with its own tough stance with regard to the strengthen federal ministries and reduce regional ambitions of Iran. The UAE has been the autonomy of individual emirates faced firm in its opposition of the Iranian occupation stiff resistance from Dubai and Ras Al of three UAE islands in the Gulf and has put it Khaimah, which preferred the rather loose repeatedly on the agenda of the Arab League confederation that had prevailed until and other international organizations.

10 Implications of Dubai’s Debt Troubles

Control by the individual emirates is The Nakheel Sukuk and also evident in other areas such as the police Immediate Developments force, parts of the judiciary, education, Ahead transport, utility companies, compilation of statistics and stock markets. The country’s On December 14, the $3.5 billion sukuk Central Bank was only founded in 1980 and of Nakheel will be due for payment. While its role in the overall banking framework is postponement of bilateral loans behind the relatively underdeveloped if compared to scenes has been somehow expected, the other countries in the region. rating agencies have made it repeatedly The UAE needs increasing unification clear that repayment of publicly traded of policies and standards for its ambitious debt instruments would be regarded as development drive. It also needs a litmus test and involuntary rescheduling substantially improved statistics which as a default, which would seriously harm so far are often not available in a timely, credit sentiment for Dubai. For a voluntary complete and consistent fashion. Like restructuring, 75 percent of the bondholders elsewhere, there will need to be more would need to approve changes to the terms regulation of capital markets, while a of the sukuk at an extraordinary general unification of the stock markets in Dubai and meeting which would require a 21-day notice Abu Dhabi could strengthen the position of period. As there is a two-week grace period the UAE as a niche player in international after December 14, such a meeting would capital markets. In this context, it needs to need to be held no later than December 28 be remembered that Abu Dhabi played a and would need to be announced no later major role in the refinancing of Borse Dubai than December 7. Otherwise, chances for in February 2009. A looming electricity a voluntary restructuring look slim and a shortage will require the development of default becomes more likely. Abu Dhabi’s sour gas reserves and new A group of international investors led power generation capacities, possibly by the US hedge fund QVT Financial LP fueled by nuclear and renewable energy. has hired Ashurst, a London law firm, to Urban development is increasingly advise them on their options, according to intertwined with people living in one emirate a report by the London-based Times. The and working in the other and coordinated group accounts for more than 25 percent of planning will be required especially in the Nakheel’s bonds by value and would thus field of transport networks and railroads. have a veto power at a possible general More unification and centralized control of meeting of bondholders. According to the the judiciary could contribute to furthering Times, the group examined two possible the rule of law and improve the international approaches in case of a default. One would image of the UAE as an investment seek to seize Nakheel’s real-estate assets destination, which has been bruised in Dubai, the other would focus on Dubai recently by lack of corporate governance World’s parent-company guarantee on the and investor protection. Finally, education debt, which could open the way for a claim plays a pivotal role in emiratization efforts against more valuable assets abroad, such which aim at increased integration of young as P&O Ferries Ltd. or the Queen Elizabeth nationals in the workforce. 2 cruise liner. As the underlying assets of

11 Implications of Dubai’s Debt Troubles

the Nakheel sukuk are undeveloped plots have been discussing four possible options of the project, which is with regards to the Nakheel bond: a) a currently on hold, their current market value full repayment of the bond, b) offering is likely to be low. bondholders 80 percent of the redemption There is no legal precedent for recourse value in a voluntary restructuring, c) a debt to assets in case of a sukuk default thus far. holiday followed by a rescheduling of debt In many cases, sukuks are “asset based” and d) liquidation of Dubai World assets in rather than “asset backed.” They were response to legal action by bondholders. designed to satisfy legalistic requirements Whatever scenario unfolds, it will have of Shari’a law in order to circumvent the ban wide ranging implications for Dubai’s future on interest, not to establish a waterproofed creditworthiness and access to international recourse to underlying assets. The capital markets. Declaration of Trust in the Nakheel sukuk contract is governed by English law, and Conclusion considerable ambiguity exists whether all its stipulations would be applicable under Dubai’s debt predicament requires UAE law or whether assets of government- decisive restructuring, especially in the related entities can be seized under UAE ailing real estate sector. Compared to law at all. As Dubai, Bahrain and other other countries in the Middle East, Dubai Gulf countries aspire to play a leading role has a competitive advantage in terms in the growing global market of Islamic of infrastructure, lifestyle and business Banking, it will be important to convincingly facilitation. It also has a successful role to clarify such legal ambiguities and improve play as a regional trading hub, provided it regulation. Doubts about the viability can rid itself of past exuberance. Markets of sukuk contracts have already been can stomach frankness if it is administered raised by a verdict of the Bahrain-based with a clear strategic vision and decisive Accounting and Auditing Organization for action, but they are very sensitive to Islamic Financial Institutions (AAOIFI) in prolonged periods of uncertainty. With 2008 when it declared a majority of them declining oil revenues in Dubai and the as non-Sharia compliant for lack of real impact of the financial crisis, funding of risk sharing on the part of the investor. The UAE development efforts relies more on Nakheel sukuk would be the third one to Abu Dhabi than in the past. The ambitious default after Kuwait Investment Dar’s $100 development goals of the UAE and its wish million sukuk in May and the one of a Saad to play a more visible role in international Group subsidiary over $650 million in June, affairs will also require a more centralized which is registered in Bahrain. While a bond approach to planning and institution default can happen, it would be important building. Rather than aiming at rumored to establish convincing legal clarity of sukuk equity buy-outs, Abu Dhabi will possibly try structures in such a situation, otherwise to forge a consensus for more concentration their future issuance and tradability might of responsibilities on the federal level in be seriously affected. exchange for its ongoing financial help for According to the Abu Dhabi-based Dubai and other emirates. newspaper The National, Dubai advisers

12 Implications of Dubai’s Debt Troubles

Appendix

Structure of Dubai Inc.

Source: Barclay’s Capital

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