DUBAI, (Reuters) – Fears that Dubai’s debt problems are not limited to troubled state conglomerate Dubai World battered investor confidence in the world’s top oil-exporting region and sent Gulf shares tumbling on Wednesday.
Investors have been left in the dark since the Gulf business hub announced on Nov 25 that it sought to delay payment on Dubai World debt while it overhauls the sprawling state firm, which builds and operates everything from ports to luxury flats.
While Dubai’s government has tried to ring-fence profitable businesses from the $26 billion restructuring at Dubai World, its problems have led to credit downgrades on all government-linked firms amid investor fears that state aid would not be forthcoming in times of trouble. “International banks are not going to see this as a Dubai World problem. They will see it as a state problem, a regional problem,” said Keith Edwards, head of asset management at Doha-based firm The First Investor.
Dubai World unit Nakheel, the developer whose debt is at the centre of the crisis, has a $3.5 billion bond maturing Monday. The bond’s trustee, Deutsche Bank, held a conference call on Wednesday to coordinate the administrative process, sources said, but it was not clear what would happen next.
Ratings agencies said downgrades could accelerate a payment clause for $2 billion in debts at Dubai’s water and power firm.
A spokesman at the utility firm rejected the notion, but, underscoring potential problems for other Dubai firms, a unit of Dubai Holding, which belongs to the emirate’s ruler, has sold its stake in Egyptian investment bank EFG Hermes.
Analysts said the move highlighted Dubai Holdings’ vulnerable position as most at risk of defaulting on debt after Dubai World as capital markets become more reluctant to lend Dubai, a member of the United Arab Emirates federation.
Dubai’s Emaar Properties, one of the UAE’s biggest developers, said on Wednesday it had decided to drop a proposed merger with three entities owned by Dubai Holding because the marriage would bring no economic benefits. “Refinancing for anything with Dubai’s name on it is now going to be very difficult,” said David Butter, director for Middle East and North Africa at Economist Intelligence Unit. “The crisis has exposed the difficulty Dubai authorities will have in trying to cordon off … real problem areas.”
Dubai’s predicament stands in stark contrast to the boom years when it snapped up assets, lured celebrities and courted the media with projects such as the world’s tallest building. But whereas neighbours funded growth with proceeds from soaring oil prices, Dubai borrowed to invest through a network of state-linked conglomerates that offered limited transparency.
Creditors kept lending on the implicit understanding that Dubai firms were backed by the government and that Dubai itself was backed by the UAE, the world’s third-largest oil exporter.
In the wake of the crisis, Dubai’s government has said its assets, which include Emirates airline, would not be involved in any firesale to plug Dubai World’s debt, though assets belonging to the conglomerate itself could be sold.
Dubai World has already ring-fenced prized holdings from Istithmar World, profitable port operator DP World and Jebel Ali Free Zone. On Tuesday, it added Dubai Drydocks World to the list of businesses not for sale.
But in a sign that Dubai World may struggle to keep its trophy buys, Istithmar World sold its W Hotel in Manhattan in a foreclosure auction on Tuesday for $2 million. It bought the property for $282 million in 2006.
With time running out, bondholders may have to accept some form of ‘haircut’ or impairment, leaving Dubai World free to negotiate with longer-term debt holders, several bankers said. “Banks need to stabilise the market and achieve that by not falling behind other creditors,” one banker said. But vociferous minority holders of Nakheel’s $3.5 billion Islamic bond are demanding repayment, which could tip both Dubai World and the builder of the emirate’s palm islands into default and potentially damage larger claims.
The cost of insuring Dubai’s debt against restructuring or default rose sharply on Wednesday as investors grew increasingly nervous about Dubai World’s restructuring. Nakheel’s December bond fell 1 point to 46 cents on the dollar, a record low, on Wednesday, compared with 110 just before the standstill request. “This does not really enhance Nakheel’s ability to meet near-term obligations,” said Roy Cherry, vice president research, real estate and construction at Shuaa Capital.
Nakheel added to battered sentiment after its financial statements showed liabilities jumping 7 percent in the first half and it made a loss of more than $3.6 billion.
Asia-focused bank Standard Chartered, which is one of Dubai World’s creditors, said any losses it suffers in Dubai were unlikely to be material. But Dubai’s stock index tumbled to a 38-week low with construction and real estate companies all down by the daily limit, leading a retreat across all Gulf Arab markets. “There’s no reason to buy back into the market without having a clear picture on what’s going on,” Samer al-Jaouni, General Manager of Middle East Financial Brokerage Co, said. “Confidence has been lost,” he added.
UAE President Sheikh Khalifa bin Zayed al-Nahayan sought to reassure markets again on Wednesday, saying the world’s third-largest oil exporter was determined to contain the impact of the global crisis on its “solid” economy.