UAE finance: Dubai’s last resort

FROM THE ECONOMIST INTELLIGENCE UNIT

Dubai World has indicated to its creditors that it is considering selling assets to enable it to manage its debts. It has also provided a figure for its total debt that is significantly higher than the US$26bn that was stated in an IMF tally published earlier this year. While there has been some negative reaction to these disclosures—and the manner in which they have reached the public domain—creditors still seem to be committed to signing a collective rescheduling deal rather than taking their claims individually to a special tribunal.

The Dubai World document detailing the conglomerate’s estimates of what it could reap from asset sales and laying out the new debt figures was presented to creditors at a meeting in Dubai on July 22nd, according to Reuters, which reported the news on August 25th. Dubai World is aiming to conclude an agreement with its creditors by end-September over US$14.4bn of its debts, based on issuing new loans with maturities of five to eight years, carrying interest of between 1% and about 3.5%. The leaked document appears to have been intended to persuade creditors that Dubai World would be able to pay off the entire principal of this restructured debt by the end of the eight-year period through realising the value of its assets if this were absolutely necessary. It estimated the present value of its portfolio at up to US$10.4bn, and projected future values as reaching US$19.4bn after eight years.

More debt

The US$19.4bn would clearly be sufficient to pay off the restructured debt, but Dubai World and its affiliates also have other debts to service. The document reportedly put the total amount of Dubai World debt outstanding as of end-2009 at US$39.9bn. This is more than 50% higher than previous estimates, but it is not yet clear why the discrepancy has arisen—some of the additional debt could be in form of borrowing from the US$20bn Dubai Financial Support Fund (DFSF), which was established in 2009 through issuing bonds to the UAE Central Bank and to Abu Dhabi-based banks. There is an additional US$11bn in non-recourse debt owed by Istithmar, Dubai World’s investment bank, which does not appear to figure in the new total.

The emergence of this higher debt figure has prompted fresh accusations that the Dubai government is not living up to its stated commitment to transparency—creditors were badly bruised by Dubai’s surprise debt standstill announcement in November 2009, and remain wary. There has also been adverse comment about the disclosure that Dubai World is prepared to sell some of its most prized assets, including DP World (a global port operator that has minority shareholders) and the Jebel Ali Free Zone; it had earlier been understood that these assets, which continue to provide important cashflow, would be off-limits. Moreover, it is unclear how much of the sales by Istithmar would accrue to Dubai World, given the separate debts that are tied up in these assets.

Sweetener

One of the main themes of the original restructuring plan that was announced in March was the government’s determination to sustain Dubai World and its affiliates, notably the heavily exposed real estate company, Nakheel, as going concerns. The company has indicated that it is preparing to embark on a new phase with the appointment of a managing director and a chief financial officer to take charge at the end of the year, replacing Aidan Birkett, a Deloitte executive who has been in effect running Dubai World in the guise if chief restructuring officer for the past few months. Nakheel is to be boosted with injections of equity from the DFSF and through obtaining new assets transferred from Dubai World. Finally, creditors have been offered the incentive of consent fees of between US$150,000 and US$800,000 if they sign up to the restructuring proposal by September 9th.

Reality check

The renewed debate about Dubai’s handling of its debt problems is likely to puncture some of the optimism that the Dubai authorities have been seeking to foster, with Emirates airline embarking on further ambitious expansion plans, traffic through Dubai airport rising strongly and DP World chalking up large profits. The latest disclosures have provided a reminder of the scale of the task that Dubai faces in recovering its financial poise.
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