DUBAI UPDATE: Abu Dhabi Throws Dubai $10B Lifeline

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DUBAI UPDATE: Abu Dhabi Throws Dubai $10B Lifeline

Posted by Alex Finkelstein 12/14/09 1:25 PM EST
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(ABU DHABI, U.A.E.) -- True to its word, Abu Dhabi has proven itself to be a good neighbor of Dubai, handing the emirate a $10 billion loan to help fend off creditors seeking repayment on a total $56 billion of unpayable debt.

Dubai World Island

The $10 billion immediately saved Dubai World's development arm, Nakheel, from plunging into default on a $4.1 maturing bond due today, (Dec. 14)

Nakheel, which is building palm tree-shaped islands off the emirate's coast, posted a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property.

The firm's repayment of the bond was the biggest debt obligation for a Dubai entity since global credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc.

The $10 billion loan marks the third time this year Dubai's ruler, Sheikh Mohammed Bin Rashid Al Maktoum, has asked Abu Dhabi for a handout.

Sheikh Mohammed Bin Rashid Al Maktoum

Dubai World has asked creditors to give it a six-month grace period for repaying the balance of the bond debt load. Several of the creditors have already refused to do so. (See other story links at the bottom of this article.)

After paying off the $4.1 million loan, Dubai World says it plans to use the rest of the money to its interest and operating costs until the company reaches a standstill agreement with its creditors, according to a prepared statement by the Dubai emirate.

Despite the assistance from Abu Dhabi, global financial experts familiar with Dubai World's expansion mode over the last five years have negative vibes on the company's future health.

"The vast majority of investors have lost money here," said Luis Costa, an emerging markets debt strategist at Commerzbank AG in London.

Luis Costa

"Imagine the number of investors who actually had to get rid of this paper under the default pressure. This outcome will raise red flags on Dubai's ability to make independent decisions."

Other Dubai watchers are more optimistic.

"It comes as a relief for the market, underpinning hopes that the implicit government support for Dubai corporate issuance is intact," says Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. "While we are not out of the woods yet, it is definitely a step in the right direction."

Abdul Kadir Hussein cropped.bmp Abdul Kadir Hussein

"The fund injection gives some leeway to Dubai World to put together an orderly debt restructuring plan as it tries to alter its debt profile," says Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd.

"We don't anticipate any knock-on effects on the other government related entities' ratings" from Dubai's announcement that it received cash from Abu Dhabi, Standard & Poor's credit analyst Farouk Soussa said in an interview.

While Dubai's government owns 100 percent of Dubai World, it hasn't guaranteed the company's debt and creditors must help it restructure, Abdulrahman Al Saleh, director general of Dubai's Department of Finance, said Nov. 30.

Abu Dhabi is the largest of the seven emirates that formed the United Arab Emirates in 1971 and owns more than 90 percent of its oil reserves, the world's sixth largest.

Abdulrahman al-Saleh

The Associated Press reports Dubai, the second-largest emirate, has traditionally guarded its autonomy, maintaining a separate army until 1996 and keeping full control of economic affairs.

The latest $10 billion bailout followed the sale of $10 billion in Dubai bonds to the national central bank based in Abu Dhabi in February and a $5 billion loan by two Abu Dhabi-owned commercial banks on Nov. 25.

Dubai's bailout announcement sent European banking stocks higher, led by Standard Chartered Plc and HSBC Holdings Plc.

Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, while HSBC has the most at risk in the U.A.E., according to JPMorgan Chase & Co.

RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report on Nov. 27, citing Dealogic data.

HSBC on Nov. 27 said it had $15.9 billion in loans to customers in the U.A.E. at the end of June. Standard Chartered has $18 billion of loans to the Middle East and South Asia, of which two thirds relates to the U.A.E., the bank said last week.

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