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Dubai World, owner of master-developer Nakheel, and owned by the Dubai government will ask creditors for a “standstill” and an extension of maturities for all debt financing by 6 month, to “at least 30 May 2010” according to an official statement.
Nakheel, the developer of the iconic man-made palm islands has a US $3.52 billion Islamic bond (sukuk) maturing on 14 December 2009. Dubai World-owned developer Limitless, has a further US $1.2 billion Islamic bond maturing on 31 March 2009. Dubai World has at least US $59 billion of liabilities, forming about 60% of Dubai’s total debt.
Nakheel's sukuk prices immediately fell more than 20 points to 87. Major stocks listed on the Dubai Financial Market lost the maximum daily amount allowed of 10 percent. Stocks on the Abu Dhabi Stock Exchange also lost the maximum allowed.
The Department of Finance said US $5 billion Dubai were raised today by selling bonds to two Abu Dhabi government-controlled banks for its support fund. The statement said that the bonds and the restructuring plan were unconnected.
November 25-30, 2009
Analysis and Forecast: increasing risk
The announcement is a turning point in the development process of Dubai. It is an acknowledgement by the Dubai government of its failure to secure help to address is massive debt. Now that this point has been reached, it is very unlikely Dubai will fully recover before substantial sources of financial help are found. With this expected default, sources of such help are more limited and so is most likely to come from Abu Dhabi, but as it has reached this critical stage for Dubai, it will come at a much larger political price. Indeed, Abu Dhabi has already announced its intention to only selectively help troubled Dubai entities, indicating that it expects a share or say in the entities it helps.
The development of Dubai in the short to medium term will very much be influenced by help from Abu Dhabi, unless other sources of income – possibly from other Gulf states, are found.
Even if the Nakheel sukuk’s are paid on 14 December - their maturity date, this will not be enough to improve things. The credibility of Dubai has been shaken and repayment of the Nakheel sukuk is only part of a much larger and more serious long-term problem.
The implications for Dubai are also to do with questions about governance. The timing and the way the announcement was made has shocked many observers, as it was made on the eve of a major regional holiday. In addition to the financial troubles, Dubai now faces serious question marks about its transparency. These have to be thoroughly addressed before investor confidence returns, something that will take a number of years to achieve.
There are two immediate tests posed for both the federal and Dubai governments, which can help alleviate concerns:
- Although the federal UAE Central Bank has issued a statement aimed to improve liquidity in local banks to avoid a run on deposits, the test is to see how quick the Central Bank will be in announcing the extent of exposure of UAE banks to the crisis;
- The test of the Dubai government is to see how quickly they announce details of Dubai’s and Dubai World’s debts.
In Dubai, the major companies that will be affected include banks, real estate developers and contractors. All have had their stock prices crash by the maximum daily amount allowed of 10 percent in the one day of trading after the end of the holiday.
Abu Dhabi and the rest of the UAE will also be affected, particularly banks that are exposed to Dubai. Although there is a possibility that investments destined for Dubai might be diverted to other GCC markets including Abu Dhabi, the issue of transparency and governance has to be addressed by those new markets as well as the shattering of confidence has not only hit Dubai, but the whole region.
The figure below shows the expected Dubai debt repayment for the next four years.
