Dubai has made significant strides in restructuring or repaying existing debts left over from the 2008/09 global financial crisis. The emirate is seemingly winning back the confidence of its creditors. These have agreed to large-scale debt restructuring deals, such as the Dubai World agreement in February, which is now just pending final approvals.

“Dubai debt is not such a big story anymore. Confidence is returning,” says Sebastien Henin, head of asset management at Abu Dhabi-based company The National Investor.

Market sentiment

Dubai has also begun to borrow again, suggesting that market sentiment is beginning to favour Dubai risk once more. Last month, Port & Free Zone World, the holding company that owns port operator DP World, which in turn is part of the Dubai World conglomerate, closed a $1.2bn syndicated loan.

Total Dubai debt, including obligations owed by government-related entities (GREs) with minority ownership, totalled about $141.7bn as of April 2014, according to a report from the Washington-based IMF. This has since declined, due to some GREs repaying obligations.

There is no question that Dubai has high levels of debt. But the emirate’s economy is growing, and lenders and investors are increasingly convinced of its ability to meet its obligations.

The Dubai debt story began in 2009, at the height of the global financial crisis.

Hit hard by the emirate’s property crash that year, the government-backed conglomerate Dubai World, which on top of DP World also owns assets in financial services and transport and logistics, stalled with its repayments on a total of $26bn-worth of debt.

Key fact

Dubai’s GDP is likely to hit 4.5 per cent growth this year

Source: Dubai Department of Economic Development

Other entities, such as property developer Nakheel, also stalled on repayments, but Dubai World emerged as the holder of the largest slice of the emirate’s total outstanding debt obligations. After months of negotiations, by 2011, Dubai World managed to secure a restructuring deal with its creditors.

Four years later, Dubai’s economic environment has improved significantly.

The government outlined a budget of AED41bn ($11.2bn) for 2015, with no deficit. It is the largest budget since the financial crisis. According to the Dubai Department of Economic Development, the emirate’s GDP is likely to hit 4.5 per cent growth this year. The pipeline for infrastructure developments is promising, with the emirate set to invest in metro and airport expansions, as well as pushing ahead with plans to build solar power plants. Dubai’s successful bid to host the World Expo in 2020 is helping to drive these infrastructure plans.

Against this backdrop, Dubai World decided to begin pressing for a debt restructuring.

Dubai debt
Entity Debt ($bn)
Dubai government  29.3
Other Dubai sovereign debt  26.1
Dubai World and subsidiaries  29.6
ICD and subsidiaries  20.3
Dubai Holding and subsidiaries  16.1
Nakheel* 2.7
Other Dubai (Dewa, etc)  11.3
Total debt  135.4
Total including GREs with minority government ownership 141.7
ICD=Investment Corporation of Dubai; *=Nakheel repaid all its bank debt in August 2014; Dewa=Dubai Electricity & Water Authority; GRE=Government-related entity. Source: IMF 

The emirate’s government was aware that to host the Expo, as well as reignite the economy, it needed to increase its spending on infrastructure. It would not want funds for project plans diverted into paying back billions of dollars of debt to banks.

Dubai World reportedly began talks with creditors in mid-2014 and went through the Dubai World Tribunal process, originally set up in 2009 to provide a framework for Dubai World’s refinancing negotiations.

Successful restructuring

By going through the tribunal and taking advantage of a piece of legislation known as Decree 57, Dubai World has been able to push through material changes to the original loan documentation with only 66 per cent approval from creditors. Typically, under the terms of a conventional loan contract, 100 per cent of creditors would have to approve changes.

Yet by February this year Dubai World had secured 100 per cent of creditors’ approval for a debt restructuring plan, which meant a deal could be done outside the tribunal process.

“The current positive investment climate in Dubai is likely one of the reasons Dubai World was able to secure creditor approval for its debt restructuring,” says Henin.

Attractive terms

The terms of the restructuring are far more attractive for creditors than those reached back in 2011. They include the immediate repayment of the smaller $2.96bn tranche of its $14.6bn of debt this year, once the restructuring deal is finally signed off. Repayment of the $11.7bn tranche has been extended from 2018 to 2022.

Furthermore, it has an amortising repayment structure, meaning banks receive repayments at regular scheduled intervals rather than in one lump sum at the end of the loan maturity.

The impact of the debt restructuring on Dubai has so far been positively received. “When you have a refinancing that is successful, it is positive for other Dubai entities and GREs,” says Karim Nassif, an analyst at the US’ Standard & Poor’s (S&P) based in Dubai. “It shows the level of confidence that capital markets, banks and investors have in the market.

“If it is a question of kicking the can down the road, that’s one thing. But if you have actually repaid a substantial amount of debt and you have a clear amortisation schedule that will lead to the expiry of that debt, then that is another thing. It is also the terms of these refinancings that are important.”

Problem loans

Dubai’s banking sector has particularly benefited from the deal, as it has reduced the sector’s ratio of non-performing loans (NPLs).

According to US ratings agency Moody’s Investors Service, Dubai World’s debt exposure represents about 22 per cent of the UAE’s total problem loans, which stood at 8.7 per cent of total lending as of June 2014.

Local bank Emirates NBDhad one of the largest exposures to Dubai World debt and, once the restructuring deal was reached, it was able to reclassify its exposure to the conglomerate as performing debt as opposed to non-performing debt, which has had a positive impact on the sector as a whole.

Moody’s estimates that the reclassification of Dubai World debt will reduce the UAE’s NPL ratio by about 2 per cent, bringing the total ratio down to 6 per cent for the full year 2014.

Dubai World also took steps towards the end of last year to ensure it can meet its repayment obligations by disposing of some assets.

Asset sales

Creditors had been concerned by the lack of momentum behind the planned asset sales by the GRE in recent years. They had expected it to dispose of some assets to repay the original 2011 restructured debt.
Yet by the end of last year, Dubai World had only sold off Economic Free Zones, which owns the Jebel Ali Freezone (Jafza), to its subsidiary DP World in a $2.6bn deal.

The acquisition will include DP World taking on $859m-worth of Jafza’s outstanding debt, which was expected to ease the pressure on Dubai World’s balance sheet.

Dubai World has also now returned to the bank market, raising a $1.2bn syndicated loan via its wholly-owned subsidiary Ports & Free Zone World in March.

The loan was arranged by the UK’s HSBC, the US’ Citibank and Emirates NBD, and a further seven banks – mainly local – joined during syndication. The loan could be used to partially repay Dubai World’s debt that is due this year.

Dubai Holdings, a GRE that has assets in the media, tourism and property sectors, including the hotel chain Jumeirah Group, has also tackled some of its debt obligations over the past year. In January 2014, the company repaid its e750m ($810.4m) bond upon maturity and prepaid an amortising corporate bank facility in April 2014.

However, by the end of the year it managed to increase its total debt obligations by raising additional financing at business-unit level.

Dubai Holdings

The company’s next biggest public debt maturity is a £500m ($747.3m) bond due in February 2017. Dubai Holdings improved its debt-to-equity ratio last year, reducing it to 0.52 compared with 0.61 in 2013.
Property developer Nakheel also repaid its AED7.9bn-worth of bank debt to its creditors last August, four years earlier than planned.

Dubai still has many more debts to pay and it will spend 6 per cent of the government’s 2015 budget on debt servicing.

Yet, the sustainability of this debt is improving and that is reassuring the market. This is demonstrated by Dubai’s improving Credit Default Swap (CDS) price, which reflects the cost of insuring debt against sovereign risk. At the height of the financial crisis, the CDS price soared to 700 basis points. It is now hovering around 210 basis points.

At the height of the financial recession in 2009, Dubai’s debt peaked to 66 per cent of the emirate’s GDP in 2009. It declined to 60 per cent in 2013.

“Although Dubai’s total debt has not significantly declined, the emirate’s debt-to-GDP ratio is improving, and the reorganisation and sale of some assets has also improved Dubai’s risk profile,” says Henin.

As of last year’s forecasts, the IMF said that if there are no serious shocks to Dubai’s growth rate, the debt-to-GDP ratio will decline to 53 per cent this year. Yet in the event of another property crash and a global economic downturn, the debt ratio could soar back up to 68 per cent.

Warning signs

Since the IMF’s forecasts, the global price of oil has plummeted to about $55 a barrel, placing pressure on the government balance sheets of Gulf countries.

But fears about the impact on Dubai’s debt repayments and budget have been slightly more muted due to the emirate’s already highly diversified economy. Oil revenues will account for 4 per cent of Dubai’s budget this year.

“In the near term, we think Dubai should be able to tackle refinancing challenges, but the possible increase in government external borrowing is set to take place against a more challenging backdrop,” said a note issued in late 2014 by the US’ Bank of America Merrill Lynch.

More recent reports have revealed signs of a slowdown in Dubai’s property market, with CBRE’s first-quarter report finding that residential prices fell by 2 per cent in the first three months of the year.

The long-term impact and direction of oil prices, as well as slumps in Dubai’s real estate sector, will inevitably raise some concerns about the emirate’s long-term economic growth and ability to repay debts.

Confidence in the sustainability of Dubai’s debt has clearly improved, but it is not clear yet how long-term and resilient that level of confidence is.