| randallscott35 |
11-26-2009 12:38 PM |
Emirate has a lot of explaining to do
By Roula Khalaf, Middle East Editor, Financial Times
It came in a short statement about the restructuring of Dubai World, one of the emirate’s biggest and best-known companies, with the big news buried near the end. But the decision to ask bondholders of the company and its most troubled subsidiary, Nakheel, to extend maturities from December to May 2010 was a bombshell. And the Middle East’s most glamorous and creative emirate will pay the price of its decision for a long time to come. For months, all indications in Dubai were that the heavily indebted city-state, symbol of the rise of the region as an economic powerhouse as much as of the excesses of the pre-financial crunch days, would meet the obligations of the companies in which it has stakes, and that Nakheel’s $4bn debt due in December would be repaid. Only a few weeks ago, bankers in the region were so upbeat some had suggested that Dubai might not even need to raise more funds to pay debts due this year. It helped of course that the emirate was showing signs of recovery, with fewer expatriates packing their bags than expected, retail sales on the rise and the real estate sector beginning to stabilise. The government itself looked confident too, raising $2bn in Islamic bonds last month.
As always, though, the problem in Dubai is that no one had all the facts, and perhaps some in the financial community had made all the wrong assumptions. The whole affair, one analyst told me on Thursday, was “typical of the way things work in Dubai – top down and in a vacuum – and that makes it very difficult for investors”. True, top officials had indicated repeatedly that Dubai would not default on its debt – and Nakheel, the Palm real estate developer, was assumed to be too important for Dubai’s image. But officials did not explicitly say that the repayments would be made on time. Moreover, the recent prospectus to test market appetite for government bonds said the government was “not legally obliged” to meet the obligations of related entities – what is commonly referred to as Dubai Inc – but might at its sole discretion decide to extend such support. Most of the funds raised in the past year – including from Abu Dhabi banks on Wednesday – were by the government itself, rather than individual companies.
So what was Sheikh Mohammed bin Rashid, Dubai’s ruler, up to on Wednesday? Was he indicating, as some suggest, that the government would allow Dubai’s bad companies to suffer in order to save the good ones? Was he simply trying to force the hand of the Dubai World bondholders to buy some time and leave open the option of repaying the debt next month if he had to? Perhaps Dubai is convinced that as the government of the emirate raises fresh funds and restructures companies related to it, the emirate is consolidating its creditworthiness. Farouk Soussa of Standard & Poor’s says that lending to the government now arguably becomes less risky because it is putting the funds to better use. But he also says this is cancelled out by the lack of transparency.
Whatever the Dubai ruler’s intention, the way Dubai has gone about its financial business has hugely damaged its standing. Bankers and investors are furious, feeling they were led on the wrong path. Analysts, meanwhile, have been scrambling to reconsider the assessments they had recently made about Dubai. The assumption that Abu Dhabi would always stand by Dubai and its flagship companies is now suddenly seen as unsustainable. Was this perhaps Abu Dhabi’s way of taking its revenge on Dubai for the excesses of the boom years? I doubt it. The rivalry between the two emirates is less important than the implications of Dubai unravelling. The cost of insuring Abu Dhabi debt went up on the Dubai announcement.
It has to be remembered that many of Abu Dhabi’s companies are exposed to Dubai, having been some of the most enthusiastic investors. Whatever Dubai is up to, assuming there is some big strategy, it should have explained itself before raising the prospect of default – and it needs to do a lot more explaining now.
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