Debt-hit Dubai gets surprise $10 billion bailout
Investors in Dubai
DUBAI – Abu Dhabi threw its flashy but debt-laden neighbor Dubai a $10 billion lifeline on Monday to head off a bond default, cheering Gulf and global markets but raising questions about the undisclosed terms.
The surprise rescue should enable Dubai World to repay a $4.1 billion Islamic bond its property developer unit Nakheel was due to honor on Monday, but which has a 14-day grace period for payment.
The cost of insuring Dubai’s debt against default fell sharply on the news and the stock market in the glitzy emirate rose 10.4 percent, its biggest one-day gain in 14 months. Shares in Abu Dhabi and Qatar also recovered on relief that an immediate crisis had been averted.
The bail-out marked a spectacular double policy shift. Dubai last month declined to take responsibility for Dubai World’s debts, and conservative Abu Dhabi had given no hint that it would ride to the flamboyant fellow emirate’s rescue.
A Dubai government statement said the remaining funds would support Dubai World until the end of April next year.
But the conglomerate at the center of a $26 billion debt storm still needs creditors to agree a standstill on a massive restructuring in order to get financial support to cover working capital and interest expenses.
Analysts said the emirate’s troubles were far from over, and they questioned a statement by a Dubai government source that there were no conditions on the loan beyond the debt standstill.
“We’ve still got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing,” said Saud Masud at UBS. “The big question is how are they are going to do this next step?”
Loan or grant?
Neither emirate made clear whether the bail-out was a loan or a grant. A Dubai government source who would not give his name told journalists on a telephone conference call that there was “no conditionality,” although he also said the terms were “internal” to the governments involved.
Among issues on which Abu Dhabi may seek concessions are Dubai’s trade with Iran, the future of its Emirates airline, and its freewheeling nightlife in a conservative Muslim region.
Upping pressure for a debt restructuring, Dubai announced it would implement immediately an insolvency law modeled on U.S. and British practices in the event that Dubai World needs to seek protection from its creditors.
A government statement said this was necessary because Dubai World’s existing structure did not allow it to seek protection from creditors .
‘A crucial and essential lifeline’
Dubai World rocked global markets on November 25 when it asked creditors for a standstill on $26 billion in debt mainly linked to its two property firms, Nakheel and Limitless World.
“This is kind of above and beyond what people expected. It is a crucial and essential lifeline,” said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole in Riyadh. “That should bring in a lot of confidence. Basically Abu Dhabi is footing the bill.
“I highly doubt this kind of money has no strings attached. There was no other choice for Abu Dhabi but to bail out Dubai. The (United Arab Emirates) federation would have been at stake.”
The price of Nakheel’s January 2011 bond leapt to 64/68 cents in the dollar from Friday’s close of 40 on news of the Abu Dhabi aid.
The U.S. dollar jumped against the yen, while Asian stock markets rebounded. U.S. S&P stock futures jumped 0.7 percent, reversing early losses, and European shares were also higher.
Abu Dhabi, the largest member of the United Arab Emirates and with most of the oil resources, had long been seen as a white knight for its heavily leveraged neighbor, Dubai.
Asset sales
“This is a government to government fund, the terms of that fund are internal to the government of Abu Dhabi and Dubai,” the Dubai government source said, declining to give any details.
The source said the restructuring process could include asset sales, but they would be limited to Nakheel and Limitless, excluding Istithmar World assets, which owns U.S. luxury retailer Barneys, or its port operator DP World.
The property unit’s assets included man-made islands shaped like palms and a map of the world in Dubai, as well as mixed-use real estate projects in Indonesia and Malaysia.
Asset sales
“This is a government to government fund, the terms of that fund are internal to the government of Abu Dhabi and Dubai,” the Dubai government source said, declining to give any details.
The source said the restructuring process could include asset sales, but they would be limited to Nakheel and Limitless, excluding Istithmar World assets, which owns U.S. luxury retailer Barneys, or its port operator DP World.
The property unit’s assets included man-made islands shaped like palms and a map of the world in Dubai, as well as mixed-use real estate projects in Indonesia and Malaysia.
The excess would be used to help government-controlled Dubai World up until the end of April 2010, the Dubai government said.
Sheikh Ahmed bin Saaed al-Maktoum, chairman of Dubai’s fiscal committee, said Dubai’s government would act at all times in accordance with market principles and internationally accepted business practices and the emirate would remain a strong and vibrant global financial center.
The fund news was welcome news for jittery investors but still left questions about how Dubai would manage billions more in debt obligations coming due next year.
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