Abu Dhabi bailout gives Dubai respite, not much more

Reuters | Tue Dec 15, 2009 | 9:37am IST

Abu Dhabi’s eleventh-hour bailout of neighbour Dubai will reassure investors in the short term, but with $35 billion of debts looming and little clarity on how it will pay, Dubai’s troubles are far from over. A shock announcement by Dubai on Nov. 25 that it sought a repayment freeze on $26 billion worth of debt at Dubai World, which had spearheaded the emirate’s six-year property boom, has tarnished its reputation too much for one lifeline to repair. In the background lurk fears that Dubai’s problems are not limited to the conglomerate and the lack of transparency since the announcement has underlined investor worries. “The rest of the pot … still needs restructuring (so) nothing has really changed in the overall dynamic of the government towards government-related entities (GREs),” said Farouk Soussa, head of Middle East sovereign ratings at Standard & Poor’s. “We still await very clear communication to the market on exactly what criteria (it comes with).”

While Dubai’s government has tried to ringfence profitable businesses from Dubai World’s restructuring, its problems have led to credit downgrades on all rated government-linked firms amid investor fears that state aid would not be forthcoming in times of trouble. “We’ve still      got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing. The big question is how are they are going to do this next step?” said Saud Masud, UBS head of research and senior real estate analyst. Next February, Borse Dubai has $2.5 billion of debt maturing, while Dubai ruler’s own firm, Dubai Holding, will face almost $1.9 billion of debt repayments in the first half of 2010.

Refinancing is likely to be difficult for any of Dubai’s government entities as water-tight assurances will be required from the United Arab Emirates federation, which is dominated by Abu Dhabi. It still must come to an agreement with its main creditors on Dubai World’s standstill request by Dec. 28 and the government will need to be transparent on its overall debt obligations of about $100 billion. “Creditors will look to understand where they stand and where the pressure points and possible solutions will be,” said one Dubai-based banker. “Once that is established the creditors in general will be amenable to meet repayment terms, but if there is a haircut, they will get more intrusive.” “Dubai World being addressed is one thing, but somewhere along the line we need a statement on the overall picture,” he added.


Markets’ initial reaction to the Abu Dhabi move was understandably positive, with the cost of insuring Dubai sovereign debt plummeting by more than 120 basis points. But the fundamentals have not changed. Dubai remains leveraged and in the immediate term, Abu Dhabi is the source of financial liquidity. Including Monday’s move, Abu Dhabi has pumped $15 billion into Dubai, with a further $10 billion coming from the United Arab Emirates central bank. A Dubai government source said Monday’s move could not be considered an indication of how other Dubai government-related debt would be dealt with, suggesting that Abu Dhabi will not just write blank cheques.

“The reason markets won’t view this as a long-term sustainable development is because the realities of Dubai’s financial situation remain unchanged,” said Khuram Maqsood, managing director of Emirates Capital. “If as a result of this announcement, Abu Dhabi said it was going to back all its debt and obligations it would change the situation fundamentally.” What seems certain is that Dubai will have to sell assets to repay future debt. The emirate is trying to ring-fence prized assets from its debt restructuring such as Emirates airline and once again reiterated only the assets of Dubai World’s property arms Nakheel and Limitless could be for sale. “Today’s funding by Abu Dhabi is one part but Dubai’s debt won’t be solved easily and needs a lot of measures on how to settle its debt — hair cut, sell assets — something has to be done. Dubai cannot repay anything,” an Abu Dhabi-based banker said.

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