The Dubai government is distancing itself from an estimated $63bn of debts run up by companies it owns or in which it holds a stake, according to the prospectus it is using to promote its planned $2.5bn sukuk (Islamic bond).

During the economic boom of 2003 to mid 2008, banks and investors lent money to the companies on the assumption that the government would support them if they had problems repaying their debts.

But the prospectus promoting the sukuk, which was issued on 30 October, is the first evidence that the emirate could walk away from debts amassed by companies such as Dubai World and Dubai Holding, which are known to owe lenders $27.1bn and $6.9bn respectively.

Dubai’s largest debts

Dubai World $bn
Ports, Customs & Free Zone Authority 7.8
Nakheel 7.1
Holding company 5.1
DP World 3
Dubai Drydocks 2.2
Jebel Ali Free Zone Authority 2
Dubai Holding  
Dubai Aerospace Enterprise 3.3
Holding company 1.9
Dubai International Capital 1.7

Sources: Standard & Poor; MEED

“The Dubai government is under no obligation to extend support to any government-related entity, either directly or through the Dubai Financial Support Fund [the fund created to distribute the first $10bn of a planned $20bn bond programme],” states the sukuk prospectus.

Egyptian investment bank EFG-Hermes estimates that the Dubai government, together with its related companies, owes a total of $84.7bn. But in the prospectus the government says it will only accept responsibility for $21.9bn of debt. This includes loans taken out by the Department of Civil Aviation, Investment Corporation of Dubai, the Department of Finance, and a AED9bn ($2.45bn) loan that Dubai Electricity & Water Authority took out in April 2009 to refinance some of its existing debt.

Dubai Holding and Dubai World, the emirate’s two biggest government-related companies, have debts totalling $34bn due to mature by 2013, leaving $29bn of debt owed by other government-owned firms.

“It is a clear statement that although a mechanism is in place for government-related entities to request support, and for it to be provided, the government views its own debt as different from that of those entities,” says Philipp Lotter, a Dubai-based corporate analyst at ratings agency Moody’s Investors Service.

The statement from the Dubai government could now lead ratings agencies to further downgrade the debt of several key government-owned companies.

The ratings agencies have downgraded many of these companies’ debts since the beginning of the economic crisis September 2008.

Dubai’s government denies that it ever gave the impression that the companies it owns or partly owns enjoy its financial support.

“This does not reflect a shift of attitude towards the government-related companies,” says a spokesman for the Department of Finance. “The government works closely with them, but they have never been guaranteed by the government. Support is available for entities if they apply for funds from the Dubai Financial Support Fund.”