UAE: Dubai Government calls for debt restructuring by state companies

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The Dubai Government announced yesterday that it has asked investors to extend the maturity of upcoming debt amortisations of two of its state-owned companies, Dubai World and its real estate development arm Nakheel, until 30 May 2010. Subsequently, the Dubai government has authorised Dubai Financial Support Fund to “restructure Dubai World with immediate effect”.

Dubai World is a 100% state-owned holding company that owns Nakheel (100%), a real estate developer; DP World (77%), one of the world’s largest port operators and a listed company; Drydocks World (100%), a shipbuilding and maintenance company; and Limitless LLC (100%), a real estate developer which owns various assets in Europe, Africa, Asia and the Middle East. The government of Dubai also owns a number of other entities directly or through other structures.

The upcoming bond amortisations of Dubai World are in the attached table. We calculate that in 2010, Dubai World and its subsidiaries will be redeeming about $7.8bn in the reminder of 2009 and 2010 and another $6.8bn in 2011. The most pressing redemption is the $3.52bn sukuk bond of Nakheel, which will be due on December 14, 2009 – a bond which is owned widely by overseas and GCC investors. Altogether, Dubai’s total outstanding debt stock is believed to be around $80bn and S&P estimates that the total debt amortisations of the Emirate will approach $50bn over the next three years, of which $21.9bn is owed by quasi-sovereigns between now and end-2011.

Dubai World (incl. subsidiaries) debt maturity schedule
Name	Date	Amount (USD mn)
Nakheel	14-Dec-09	3520
Limitless	31-Mar-10	1200
Nakheel	13-May-10	980
Dubai World	19-Jun-10	2100
Nakheel	11-Jan-11	1200
Dubail World	19-Jun-11	1950
Dubail World	19-Jun-11	450
Palm District Cooling	20-Jul-11	500
Port, Free Zone World	29-Sep-11	150
Port, Free Zone World	29-Sep-11	853
Dubai Drydocks	11-Oct-11	1700
Total		14603
Source: Reuters

COMMENT: Technically, this does not constitute a sovereign default, since there are no sovereign guarantees on Dubai World and its subsidiaries; in fact, the government issued a decree earlier this year stating that it will not underwrite liabilities of Dubai World. But it was the government rather than the company that announced the standstill yesterday, and investors can be forgiven for regarding the finances of the emirate and of its wholly-owned subsidiaries as not clearly distinguishable. Dubai CDS has widened sharply to 570bps and the nominal value of Nakheel bonds collapsed to 70 from previous 110.

We have been arguing that Dubai’s financing problems will have to be resolved within the broader federative structure of UAE, leaning heavily on Abu Dhabi's vast resources. Despite the distressing developments of the past 24 hours, this still remains to be the case. Dubai launched a UAE backed $20bn bond program back in February 2009 and so far tapped about $15bn from the Central Bank of UAE ($10bn) and various Abu Dhabi banks ($5bn). This implicit federative support has helped Dubai government successfully raise another $2bn from private investors in October. What the events of the past 24 hours shown is that a generic Dubai bailout will probably not be available. The UAE authorities seem more inclined to act prudently and restructure outstanding liabilities of quasi-sovereign entities that may be facing significant solvency issues, rather than paying out creditors of the quasi-sovereign entities in full and on time.

As for Dubai World and Nakheel, the details of a potential restructuring are not known; it is not even clear which subsidiaries of Dubai World will be restructured, if at all. The latest developments surrounding Dubai World and Nakheel have obviously raised serious questions over the credit quality of both the sovereign and various quasi sovereign entities in Dubai.

The way in which the UAE authorities handle the problem will clearly be important for investor confidence, as it will set a precedent for Dubai. The situation remains fluid, but taking into view the huge reputational risks involved and also the amount of leverage that currently exists in emirate we believe that the UAE authorities will be more likely to try and secure an orderly restructuring of outstanding liabilities of the two firms.

The problem is that it may be technically difficult to engineer a voluntary restructuring of short-term liabilities in the coming few days, before December 14, when Nakheel’s $3.5bn sukuk bond will mature. In that case, we may well be looking at a technical default, unless UAE authorities announce a credible alternative (re)financing plan in due course.