What is the Dubai government’s debt?

Sudip Roy

November 30, 2009

The sovereign believes that its debt obligations are much lower than the $80 billion to $90 billion that has been widely assumed. Sudip Roy reports.

As investors continue to digest the news that the debts of troubled real-estate developer Nakheel and its holding company, Dubai World, are not sovereign-backed or guaranteed, it’s worth considering what comprises the Dubai government’s explicit obligations.

Some clues as to what the government believes to be its own debt can be found in a circular document for a bond offering that it made in late October.

On October 21, the government issued a preliminary prospectus to raise $4 billion through a Euro Medium-Term Note programme. At the same time, Dubai's department of finance issued another prospectus to raise up to $2.5 billion through sukuk bonds.

Within both documents the government itemized, for the first time, what it considered to be the obligations of Dubai Inc - the sovereign itself and related entities. Dubai World and its subsidiaries, including Nakheel, were not on the list. It’s a crucial point that bond investors seem to have missed. Indeed the government's position on Nakheel's $3.52 billion sukuk, which is now being restructured, was made explicit in the circular proposal for the transaction on December 13, 2006. "Dubai World is a public corporation established pursuant to Law No. 3 of 2006 issued by His Highness Sheikh Mohammed Bin Rashid Al-Maktoum as Ruler of Dubai. Investors should note, however, that The Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World," stated the document.

In the October 2009 documents the Dubai government clarified its obligations by saying that the “aggregate direct debt of the Dubai government” is only Dh71.21 billion ($19.4 billion) – much less than the $80 billion to $90 billion now being widely reported.

That $19.4 billion figure would include the $10 billion that Dubai borrowed via the UAE’s central bank in February 2009 implying that the Dubai government had minimal borrowings before this year.

In April 2008, the sovereign issued a $1.8 billion, five-year bond. The following month, Dubai Electricity and Water Authority – the only entity whose bonds the government has ever explicitly guaranteed – issued a $750 million note due in June 2013, according to Dealogic.

Since the October documents were released, Dubai’s sovereign debts have risen to $26.4 billion thanks to the sukuk bond, which raised $2 billion eventually through a dual-tranche transaction, and the $5 billion that Dubai received from two Abu Dhabi government-majority-owned banks, on Wednesday November 25.

“Dubai has defined a much narrower group of sovereign obligations,” says Richard Fox, head of sovereigns at Fitch Ratings, who believes that it will actually prove to be a positive to Dubai once the storm passes, as its obligations will now be much easier to support.

None of this will be of comfort to investors who bought Nakheel’s bond on the assumption that it would be backed by the government.

It’s still unclear what will happen to the Nakheel bond with investors considering their options. Some foreign creditors are worried that they may not receive the same terms offered to local investors in a possible restructuring.

Dubai officials issued a statement Friday November 27 saying that the standstill request was “carefully planned.”

“The government is spearheading the restructuring of this commercial operation in the full knowledge of how markets would react,” said Sheikh Ahmed bin Saeed Al-Maktoum, chairman of Dubai’s Supreme Committee.

The actions on Wednesday also heralded for the first time explicit support from the Abu Dhabi authorities towards Dubai through the $5 billion issued by the two state-owned banks. “Until very recently Dubai was trying to sort out its debt problems through federal institutions,” says Fox, highlighting the $10 billion that the central bank provided the emirate earlier in the year. But although the central bank is based in Abu Dhabi, the federal government’s links with it are limited. “The Abu Dhabi government was not involved [in the provision of the] $10 billion,” says Fox.

The central bank was willing to provide further support to the Dubai government but in a limited way. Instead it received help from National Bank of Abu Dhabi and Al-Hilal Bank. “It’s the first concrete evidence of Abu Dhabi support for Dubai,” says Fox, who adds it’s not in the Abu Dhabi government’s interest for Dubai to default.