- Feb 23, 2009
Dubai Fund Asks for Stay on Debt Payments
LONDON — The government of Dubai, in a blunt acknowledgment of the severity of its financial position, said on Wednesday that it had asked its banks for a six-month stay on its schedule of debt repayments.
The terse statement came in the middle of negotiations between creditors and Dubai World, the corporate arm of Dubai, which has led many of its most ambitious real estate projects, but is now struggling under the burden of $59 billion in liabilities.
For the banks that financed the debt-fueled ascent of Dubai — analysts’ estimates put its total debt at about $80 billion — the move by Dubai to obtain a standstill highlights a truth that many in the region had been trying to make clear to bankers. It is that Abu Dhabi, the oil-rich governing emirate of the United Arab Emirates, will not unconditionally bail out its more profligate neighbor. Instead, a genuine restructuring of Dubai’s debt, with pain being shared equally between Dubai and its bankers, needs to take place.
The news came as a shock to the markets as well as Dubai’s bankers. The bonds of Dubai World’s property developer, Nakheel, dropped sharply and the cost of insuring against a Dubai government default soared.
To some extent, the announcement of the standstill request was mitigated by earlier news on Wednesday that Dubai had raised $5 billion from Abu Dhabi banks. Still, that figure was considerably less than the $20 billion Dubai had been hoping to attract from investors in the region as well as abroad.
“What is interesting is the timing,” said Chris Davidson, an expert on the region at Durham University. “This indicates that the money from Abu Dhabi is not to be spent on Nakheel and Dubai World.”
The decision to take such a step comes just weeks before Nakheel, the developer of Dubai’s signature palm-shaped islands, was scheduled to make payment on its $3.52 billion of Islamic bonds. The conglomerate, which also owns Dubai’s huge port operations and has taken stakes in glamorous overseas properties like Barneys and MGM Mirage in Las Vegas, has billions of dollars of payments due in the months that follow.
A representative for Dubai World declined to comment.
Earlier this year, Dubai raised $10 billion in a bond issue that was taken up by the Abu Dhabi central bank.
It is clear now that these sums have not been enough — especially as many of the assets in Dubai World’s diffuse portfolio have plunged in value over the last year.
Executives at Dubai World have said they will not engage in any distressed asset sales and that they are sure of recovery in real estate prices that have dropped by as much as 40 percent.
In its statement, Dubai said that it had appointed a special support fund to manage the restructuring effort and that Deloitte L.L.P. had been hired as an adviser in the process.
“As a first step,” the statement said, “Dubai World intends to ask all providers of financing to Dubai World and Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010.”
Dubai World is run by Sultan Ahmed bin Sulayem, a close adviser to Dubai’s ruler, Sheik Mohammed bin Rashid al-Maktoum, who has insisted publicly that Dubai and Abu Dhabi will work together to reach a solution on the debt question.
But while Abu Dhabi may sit upon 9 percent of the world’s oil and manage the largest sovereign wealth fund, it is evident now that it is not willing to just write a check to cover all of Dubai’s mounting debts — at least not right now.