Saddled with a staggering US$59 billion in liabilities, Dubai World – the state-run investment firm behind Dubai’s sizzling growth over the past 20 years – wants to delay repaying its dues until end-May next year.
In a move that has stunned investor confidence across the Persian Gulf, possibly leading to the biggest sovereign default since Argentina in 2001, the Dubai government has said that it intends to reorganise the severely cash- strapped Dubai World, which is one of the emirate’s largest and most important conglomerates.
The US$59 billion debt owed by Dubai World is a large chunk of the US$80 billion accumulated by Dubai as it rapidly expanded in various sectors such as banking, transportation and real estate.
‘Dubai World has a portfolio of strategically important businesses and the restructuring will be designed to address financial obligations and improve business efficiency for the future,’ the government said in a terse statement explaining its decision, issued just hours before the start of the Eid al-Adha holiday and the United Arab Emirates national day celebrations, which will see the region shut down until Dec 6.
The five-paragraph note also said that the Dubai Financial Support Fund – which is responsible for disbursing US$10 billion in federal rescue funds to Dubai government-controlled entities – had appointed veteran bankruptcy expert Aidan Birkett, a managing partner overseeing corporate finance at accounting firm Deloitte, as Dubai World’s chief restructuring officer.
Markets across Europe reacted negatively to the news. The FTSE 100 index of leading British shares was down 99.84 points, or 1.9 per cent, at 5,264.97.
Over in Asia, the Shanghai index fell 119.19 points, or 3.6 per cent, to close at 3,170.98, its biggest one-day fall since Aug 31. In South Korea, shares in construction issues lost ground, with Samsung C&T leading the way with a 6.2 per cent decline.
Dubai’s announcement came after the closing of its stock market for the long holiday, but the value of Nakheel’s 2009 bonds slumped 27 per cent, according to EFG-Hermes regional investment bank. US markets were closed for the annual Thanksgiving holiday.
The request for a creditor standstill also applied to Dubai World’s subsidiary, Nakheel Development, which is behind a number of extravagant real estate developments including the city-state’s Palm Jumeirah, a man-made palm-shaped island housing hotels and luxury villas that count Hollywood actor Brad Pitt and footballer David Beckham on the list of owners.
Already, home prices in Dubai have fallen 50 per cent from their peak in 2008.
Dubai World is one of Dubai’s three biggest conglomerates together with Dubai Holding and the Investment Corporation of Dubai responsible for carrying out the emirate’s development strategies. Dubai World also owns DP World, the third-largest international ports operator.
Back in 2006, DP World won a three-month battle to take over British port operator Peninsular and Oriental Steam Navigation Company (P&O) after PSA Singapore withdrew its 470 pence-a-share bid, leaving DP World’s 520 pence-a- share bid as the only offer left on the table.
After the emirate’s years of rapid growth, the sense among analysts is that the weight of the global credit crunch and recession has finally caught up on Dubai’s ambitious economic model, one that is largely based on mega-construction projects and a huge influx of foreign capital.
Eckart Woertz, an economist with Dubai’s Gulf Research Centre, told the Financial Times: ‘This will destroy confidence in Dubai – the whole process has been so opaque and unfair to investors.’
Many are finding the news hard to swallow, particularly as senior Dubai officials had over the past few months taken steps to reassure investors that the emirate would still be able to meet all its existing debt obligations. Nakheel, for one, is due to pay back US$3.5 billion on a maturing Islamic bond on Dec 14.
According to latest data from Deutsche Bank, Dubai owes US$4.3 billion next month and a further US$4.9 billion in the first quarter of 2010 in government and corporate debt.
Earlier this year, Dubai raised US$10 billion in a bond issue that was taken up by the Abu Dhabi central bank.
On Wednesday, Dubai announced that it had raised a further US$5 billion from Abu Dhabi banks – much less than the US$20 billion it had been hoping to attract in foreign investment.
In a note, the Royal Bank of Scotland said that investors would now have to ‘reappraise the quality of sovereign support’ for state-owned entities in the region.
‘The other risk is that rating agencies would reassess their views of names in the region, which in many cases benefit from substantial rating premiums driven by assumptions about sovereign support, which is no longer a given.’
Standard & Poor’s (S&P) and Moody’s Investors Service immediately downgraded the ratings of all six government-related issuers in Dubai and left them open for a possible further downgrade. Moody’s cut ratings on some government-related entities to junk status, while S&P cut ratings on some entities to one level above junk.
Source: Business Times, 27 Nov 2009