Just as Dubai was beginning to recover from the financial shocks of the past year, one of its most important firms is asking creditors for a debt standstill.
Forget the spin that what is being asked for is only a six-month delay by state-owned investment company Dubai World over the repayment of a bond issued by troubled real estate developer, Nakheel. This is Dubai World’s flagship entity within its portfolio. The restructuring shows how dire the emirate’s financial position is.
Nakheel has a $3.5 billion Islamic bond due for repayment on December 14. The bond’s performance has been a benchmark in gauging investor sentiment towards the emirate and other state-owned entities, even though the sovereign does not explicitly back the obligations of Dubai World or its entities.
In February, Nakheel’s bonds were trading as low as 63.5 cents as fears grew that the debt would have to be restructured or might even default. More recently, however, the bonds have traded above par as investors grew confident Dubai was addressing the issues.
Now that confidence has been destroyed. Some investors may even consider legal action.
Nakheel’s bonds fell nearly 70 points to a record low of 40 cents two days after the announcement, while the cost of Dubai’s five-year CDS spread more than doubled to 670 basis points.
Although many people have long warned about Dubai’s excesses, the speed of its fall from grace is still a surprise. Until this request, the emirate could argue that it had not experienced a big credit event despite its financial difficulties, unlike Kuwait, Bahrain or Saudi Arabia.
No longer.
What’s added to the uncertainty is that on the day that the request was made public, the government announced that it had raised $5 billion through two Abu Dhabi banks as part of a $20 billion bond programme. Yet this money – half of what was expected following an initial $10 billion tranche from UAE’s central bank earlier in the year – would not be used to help Nakheel repay its debt. It’s unclear where the funds will go; worryingly, it leaves the impression that there must be other, even more urgent needs.
And Dubai’s woes are far from over: its economic growth is anaemic, its real estate sector still in crisis and its banks in a rut. The go-getting days of the last decade seem a long way away.
November 2009
What is the Dubai government’s debt?
30 November 2009
26 November 2009
Sovereign cuts Dubai World adrift
27 November 2009
Nakheel bondholders have to take the pain
1 December 2009
December 2009
Ian Hay Davison, Dealing with Dubai: The regulator's tale
September 2005
In 2002 the Dubai authorities announced the appointment of a distinguished chairman to its financial regulator that would give credibility to the country's attempts to establish itself as the leading Arab financial centre. Just two years later he was fired. Ian Hay Davison gives an exclusive first-hand account of the events that led to his dismissal.