more Dubai stuff

Looks like the government of Dubai will not honor debts of Dubai World:

Fear of creditor wipe-out as Dubai jettisons conglomerate
David Robertson and Hugh Tomlinson


The Government of Dubai has refused to honour the debt obligations of its largest company, prompting fears that international creditors could be wiped out.

Dubai World, the state-owned conglomerate, was effectively abandoned to its fate by the Emirate's Government yesterday despite previous assumptions that Dubai would stand behind the company. That has raised the likelihood that lenders to Dubai World, which has liabilities of $60 billion, could lose billions of dollars.

Dubai World will be restructured and some of its assets, which include Turnberry golf course in Scotland and the former cruise ship QE2, are likely to be sold to pay down debt.

However, there is uncertainty over the robustness of creditor protection under Dubai law and lenders are understood to be concerned that they will get little or none of their money back.
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Analysts at RBC Capital Markets said: “The bottom line is that creditors have almost no legal legs to stand on to maximise recovery values.”

Royal Bank of Scotland (RBS), the bank bailed out with £53.5 billion of British taxpayer money, has been the largest loan arranger for Dubai World in the past two years, securing $2.3 billion of financing. Much of that debt will have been syndicated to other banks but RBS could lose more than £100 million as a result of Dubai’s actions. RBS declined to comment yesterday.

Dubai revealed last week that it would seek a standstill on debt repayments for Dubai World, a sprawling company that includes property developers, investment funds and a ports operation. Dubai had previously included Dubai World’s debts within its own total sovereign debt of $80 billion but it has said it has no obligation to the company’s lenders.

Abdulrahman al-Saleh, director-general of Dubai’s Department of Finance, said: “Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the Government, which is not true.”

That has sparked anger among some creditors, who believe that Dubai had given an implicit guarantee that its companies were state-backed.

In a move seen as adding insult to injury, the Government has ringfenced DP World, the profitable ports division of Dubai World, in a move designed to protect it from international creditors.

One Abu Dhabi-based legal source said: “Looking at the list of assets, DP World stands out as the jewel in the crown. That is why they are desperately trying to ringfence it, but where else are they going to find the money for these creditors?”

The turmoil in Dubai led to carnage on regional stock markets yesterday, with $9 billion wiped off their value. The Dubai Financial Market closed down 7.3 per cent and the Abu Dhabi Securities Exchange was down 8.3 per cent. Yesterday was the first day of trading after the Eid religious holiday and since Dubai announced the debt standstill.

Potential Dubai losses continued to hang over the UK banking sector yesterday, which helped to push the FTSE 100 down 55.05 points to 5,190.68.

Although Dubai’s potential debt default is not large in global terms, the state’s difficulties have raised the prospect that other countries might struggle with their growing deficits. Analysts at Deutsche Bank said: “The situation in Dubai may be a controllable event, but it reminds us how much governments are potentially on the hook for all over the world.”

The crisis at Dubai World was prompted by the need to repay a $3.5 billion Islamic bond held by Nakheel, the property developer behind the Palm Jumeirah islands, in two weeks.

Nakheel said yesterday that it was suspending trading in all three of its Islamic bonds.

However, Dubai World did make a small repayment on a $2 billion Islamic bond owed by the Jebel Ali Free Zone Authority yesterday.

By cutting Dubai World loose, Dubai has effectively reduced its sovereign debt from $80 billion to about $20 billion. As a result, the cost of insuring against a default on that debt fell yesterday. Credit default swaps, the premium paid to insure against default, fell from $645,000 per $10 million of debt on Friday to $570,000.