Dubai World in Talks on $26 Billion of Debt, Rest Is 'Stable'
Dec. 1 (Bloomberg) -- Dubai World began talks with banks torestructure $26 billion of debt, including $3.5 billion owed byproperty unit Nakheel, and said the remainder of its liabilitiesare on “a stable financial footing.”
Debt from subsidiaries including Infinity World Holding,Istithmar World and Ports & Free Zone World will be excludedfrom the negotiations, Dubai World, one of the emirate’s threemain state-related holding companies, said in a statement. Thecost to protect Dubai debt against default fell to the lowestsince Nov. 25. Dubai’s main equity index dropped 6.6 percent.
Dubai is seeking to delay payments on less than half its$59 billion of liabilities, easing the potential damage to banksrecovering from $1.7 trillion of losses and writedowns from theglobal crisis. Shares worldwide recovered some of the lossessuffered since Dubai announced it would seek a “standstill”agreement on all of Dubai World’s debt as the Dow Jones EuroStoxx 600 gained 1.2 percent and the MSCI Emerging Markets Indexshowed the first back-to-back gains in two weeks.
“Now that they’re saying $26 billion, it reduces some ofthe panic that built up in the last few days,” said NickChamie, an analyst at RBC Capital Markets in Toronto. “This ispositive. The market was feeding on its own concern and therewere talks of $60 billion debt that would need to berestructured.”
Dubai’s ruler and United Arab Emirates Prime MinisterSheikh Mohammed Bin Rashid Al Maktoum said the worldmisunderstood the government’s intention when it said state-runholding company Dubai World would renegotiate debt repayments,according to Al Arabiya television today.
‘Minor Problem’
The debt Dubai World plans to restructure includes about $6billion of Islamic bonds sold by Nakheel, according to the DubaiWorld statement today.
“Initial discussions have commenced with the banks ofDubai World and are proceeding on a constructive basis,” DubaiWorld said in the statement. “It is envisaged the restructuringprocess will be carried out in an equitable way for the overallbenefit of all stakeholders.”
Shares worldwide have been rebounding after Europe sufferedits biggest one-day stock market slump since April last week oninvestor concern Dubai’s debt delay might cause the biggestemerging-market default since Argentina in 2001.
The $26 billion figure “confirms that it’s a relativelyminor problem,” said Michael Atkin, who helps oversee $10billion in fixed-income assets as head of sovereign research atPutnam Investments in Boston. The country’s struggles serve as a“reminder that we’re not yet out of the woods in the globalfinancial system. It raises the issue of what else is outthere,” he said.
Negotiations
Royal Bank of Scotland Group Plc was the biggestunderwriter of Dubai World loans while HSBC Holdings Plc has themost at risk in the U.A.E., according to JPMorgan Chase & Co.
Banks have begun negotiating with Dubai World because they“are wary of any alternative including calling Dubai World indefault,” said Hani Sabra, associate covering the Middle Eastfor New York-based research firm Eurasia Group.
Spokespeople for RBS and HSBC declined to comment.
The United Arab Emirates’ central bank said Nov. 29 it“stands behind” the country’s local and foreign banks andoffered them access to more money under a new facility. U.A.E.Central Bank Governor Sultan Al-Suwaidi told Abu Dhabi TVyesterday there was “no need to worry” about lenders in thePersian Gulf nation.
Default Swaps
The cost of protecting against a default by Dubai fell 53basis points to 517, extending yesterday’s first decline in aweek, according to credit-default swap prices from CMADatavision. Default swaps for Abu Dhabi narrowed 9.5 basispoints to 130.5 and contracts linked to DP World Ltd. dropped63.5 basis points to 580.
The contracts, which fall as perceptions of credit qualityimprove, pay the buyer face value in exchange for the underlyingsecurities or the cash equivalent should a company fail toadhere to its debt agreements. A basis point is 0.01 percentagepoint and is equivalent to $1,000 a year on a contractprotecting $10 million of debt.
Shares in the emirates fell with Abu Dhabi’s measure wipingout its gains since May and poised for a record 13 percent two-day slump. The Dubai Financial Market index dropped 6.6 percent,heading for its steepest back-to-back decline in more than ayear. Qatar’s DSM20 Index lost as much as 9.3 percent and theKuwait Stock Exchange fell 2.6 percent in their first tradingday since the Nov. 25 restructuring announcement.
Support Fund
The Dubai government said Nov. 25 its Financial SupportFund will spearhead the workout for Dubai World and named AidanBirkett of Deloitte LLP as its chief restructuring officer. Thegovernment said Dubai World would seek an extension of loanmaturities until at least May 30, 2010.
Bondholders of Nakheel PJSC, whose Islamic bond is due Dec.14, have formed a creditor group that represents more than 25percent of the debt, said Jo Shepherd, head of public relationsat Ashurst LLC, which was appointed legal adviser. The group isconsidering its options, Shepherd said in an interview lateyesterday. More than 75 percent consent from creditors is neededto approve extraordinary resolutions.
The Nakheel 3.17 percent bonds, known as sukuk, headed forthe biggest gain in six weeks, rising to 58.5 cents on thedollar from 58 cents, according to Citigroup Inc. prices onBloomberg. The bonds, governed by Shariah laws barring investorsfrom profiting from the exchange of money, traded for 110.5cents on Nov. 23 and as low as 42 cents on the dollar Nov. 27.
Creditor Incentive
“Even though it is going to be tough to restructure $26billion of debt, Dubai World’s creditors have an incentive to doso in order to reduce the haircut that they will have to take,”said Rachel Ziemba, a senior analyst covering sovereign wealthfunds at Roubini Global Economics, a New York-based researchfirm. “Time is short but they might still avoid defaulting onNakheel’s $3.5 billion bonds due on Dec. 14.”
Dubai’s government told creditors of Dubai World yesterdaythat they should help in a restructuring the holding companybecause it hasn’t guaranteed the debt.
“The lenders should bear part of the responsibility,” thedirector general of the emirate’s finance department,Abdulrahman Al Saleh, said on state-run Dubai TV. Thegovernment’s Nov. 25 decision to seek a halt Dubai World’s debtpayments is “in the interest of all parties, the investors thecreditors and the contractors,” he said.
Housing Slump
Dubai, the second-biggest of seven emirates that make upthe U.A.E., and its state-owned companies borrowed $80 billionto fund a boom in growth and diversify the economy. The globalfinancial turmoil and a decline in property prices hurtcompanies such as Dubai World as they struggled to raise loans.
The company received financing based on the “viability ofits projects, not on government guarantees,” Al Saleh said.
Home prices in Dubai plummeted 47 percent in the secondquarter from a year ago, the steepest drop of any market,according to Knight Frank LLC. Property prices may drop further,a survey by Colliers International showed Oct. 14.
Istithmar World, Dubai World’s investment unit, bought NewYork luxury retailer Barneys in 2007 for $942.3 million. DubaiWorld agreed in 2008 to invest about $5.1 billion in U.S. casinocompany MGM Mirage as part of a plan to diversify the emirate’seconomy into entertainment and financial services.
Dubai, home to the world’s tallest tower, set up a $20billion Dubai Financial Support Fund after the seizure in creditmarkets. Dubai said Nov. 25 it borrowed $5 billion from AbuDhabi government-controlled banks for the fund, after raising$10 billion by selling bonds to the U.A.E. central bank inFebruary.
Ratings Cuts
Dubai’s government raised $1.93 billion in October fromthe biggest sale of Islamic bonds from the Gulf Arab region thisyear, and paid off a $1 billion Dubai Civil Aviation Authoritysukuk due Nov. 4. The sheikhdom and its state-owned companieshave to repay $9.2 billion of bonds and loans maturing in 2010,$19.8 billion in 2011 and $17.3 billion in the following year,Deutsche Bank AG said in report in August.
Istithmar World breached the covenants on 895 millionpounds ($1.5 billion) of loans backed by London’s Adelphi officebuilding, the issuer said in a statement.
Moody’s and Standard & Poor’s cut their ratings on Dubaistate companies, saying they may consider Dubai World’s plan todelay payments a default.
“The times of implicit support are clearly over,” saidPhilipp Lotter, vice-president of Moody’s Investors Service inDubai. “In the past, entities such as Dubai World certainlyrepresented themselves as quasi-government entities, whereasthere was no legal obligation on behalf of the government tosupport, and that has certainly shifted with last week’sannouncement.”
To contact the reporter on this story:Tal Barak Harif in New York at tbarak@bloomberg.net
Last Updated: December 1, 2009 05:16 ESTSource: Bloomberg
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