Financial services firm Dubai Group has missed two payments on separate loans in recent weeks, including one arranged by Citibank.


Reports said the company, part of a conglomerate owned by Dubai Holding, did not make a scheduled payment on a US $330m loan on which Citibank was the sole bookrunner.


The five-year loan, which matures on December 13, 2011, was used to fund the acquisition of a 49 percent stake in Bank Islam Malaysia. Bank Islam earlier this year said Dubai Group was trying to sell the stake.


Two other sources familiar with the matter said Dubai Group also missed the profit payment due on a US $1.5bn murabaha Islamic financing facility (Islamic interest), in which 24 banks have participated. Arrangers of the facility, due August 2011, include Al Hilal Bank, First Gulf Bank, Noor Islamic Bank, Qatar's Al Khaliji Commercial, Royal Bank of Scotland and Standard Bank.


Lenders are reported to have held discussions on the matter. A source close to the discussions said no decisions were made but among the options discussed was whether to send Dubai Group an official default notice on the murabaha facility.


Dubai Group said it had set up a co-ordinating committee of lenders to discuss its debt obligations, adding it would continue to service its debt.


November 14, 2010



Analysis and Forecast: Increasing Risk


This news is particularly worrying as it puts Dubai in the limelight again, highlighting the financial difficulties the emirate still faces.


Murabaha is generally a series of payments due on certain dates in which the borrower has to repay the cost plus profit, equivalent to principal and interest. Although grace periods could be written in murabaha agreements, this is not the norm. Therefore if one of the scheduled payments under the facility is missed, it is a breach of obligation and hence a default. It is not clear whether the Dubai Group agreement has a grace period. So whilst no default notice has been served yet, the fact that two payments have been missed contributes to eroding any regain of credibility that Dubai tried to achieve since the problems of November 2009.


The figure below shows the maturing debt for Dubai World in US$ billion. With this latest de-facto default, it is not clear whether Dubai World can meet its other obligations.