Dubai World’s debt standstill announcement on 25 November has been accompanied by one of the greatest media storms in Middle East business history. It was followed by a global equity market slump and myriad reports that Dubai itself was dead and buried.
The truth may be less exciting.
As its bond prospectuses in October showed, Dubai’s government has no legal obligation to back government-related entities. These include: Dubai World, owner of DP World and real estate developer Nakheel; and Dubai Holding, a conglomerate which owns Jumeirah, Tecom Investment free zones and Dubai Bank.
However much these entities owe, it is not the Dubai government’s direct responsibility. Dubai government debt, as the prospectus shows, is $21.4bn, including guarantees to the Dubai Electricity & Water Authority (Dewa). This is about 45 per cent of Dubai’s 2008 GDP. The governments of the UK and the US would love to owe so little.
What has become clear in the last week is that the amount the Dubai World conglomerate itself owes banks is much less than the $60bn most commentators have reported. That encompasses non-bank debts, including Dubai government land grants. Deutsche Bank estimates that the actual bank debt figure is about $25bn.
Announcing a debt standstill is always an option for companies facing financial difficulties. Saying a borrower will delay debt payments is often better than struggling and failing to do so.
So what we know now that we did not six weeks ago, is that Dubai government debt is far less than previously estimated; Dubai World bank obligations are probably half what has been reported and Dubai World is taking action to deal with its financial obligations as a whole rather than risking a forced default. All three are, paradoxically, good news.
Dubai World has gone into a form of protective bankruptcy, similar to the US’ chapter 11 arrangements. It is a situation fraught with difficulties that could damage Dubai and the UAE. And the true scale of what Dubai owes is still unknown.
But it is Dubai World’s creditors that face the biggest immediate problem. None can expect to receive any money until Dubai World’s assets and liabilities have been fully assessed, a judgement made about how big the gap between the two is and a schedule defined for when creditors will be paid, and how much. It is tough, particularly for those who are owed money today. But it is fair.
Lenders will now have to decide whether to accept the standstill. The earliest trigger for possible action is the 14 December due date for Nakheel’s $3.52bn sukuk. The standstill suggests Nakheel will not honour it and will be, technically, in default. Nakheel creditors will have to wait a further 14 days. The sukuk’s arranger, Deutsche Bank, is then obliged to seek their views.
The sukuk’s prospectus says any action – and the only options are to sue Nakheel or agree a restructuring – must be approved by a majority. This is an unattractive choice and is complicated by the fact that a sukuk restructuring has few precedents. Nakheel sukuk owners may prefer to accept the standstill and wait to see what happens next.
They will be encouraged by the appointment of Aidan Birkett, head of Deloitte’s global corporate finance business, as Dubai World restructuring officer. The business is not in liquidation and Deloitte is, technically, not the administrator. Birkett’s power to push through measures that Dubai World’s management might not like will now be tested. He has several options. Dubai World insists that DP World will not be part of the restructuring. But Deloitte might conclude that selling part of its 77 per cent stake in the firm would help raise money other parts of Dubai World need.
Less controversial options include divesting financial assets held by Dubai World’s private equity army Istithmar World. Selling some of Nakheel’s land bank, which comprises about half of the land in Dubai open to development, is another. A less attractive one is selling Nakheel’s incomplete projects which include Palm Jumeirah, Palm Jebel Ali, Palm Deira, Dubai Waterfront and The World islands.
Selling the family silver is always painful, but Dubai’s leaders seem to have decided that piecemeal measures will not work. This is vital in winning the support of Abu Dhabi. It is assumed that the emirate is prepared to provide open and direct financial assistance to Dubai. But the experience of the past 12 months suggests it will not be unconditional. Abu Dhabi wants Dubai to take action first. Dealing with Dubai World’s debts will allow Abu Dhabi to target its financial support to the places, and at a time, that will be best for the UAE as a whole.
Many uncertainties remain. There are reports that the contingent liabilities of Dubai government-related entities could be substantial. The financial position of some, including Dubai Holding, is also in doubt.
But the biggest question mark is over the durability of the vision of Dubai as one of the world’s greatest cities. Thousands of negative media stories, since the debt crisis broke, have hammered Dubai’s reputation. Its capacity to borrow has been decimated. The knockers and the mockers are already dancing on Dubai’s grave.
But there is good news here too. With expectations about the emirate on the floor, the only way to go is up. Gateway to a region with 60 per cent of the world’s oil and on the crossroads between Europe and China, India and the Far East, Dubai retains all the advantages it had before the debt storm started. Its challenge is proving it still believes that dreams can come true.