Proactive investors

Additional information

Additional	Information
Market:	N/A
Sector:	Media & Publishing
Epic:	PROACTIVE
News:	Latest news
Web Site:	Proactiveinvestors
Other Articles:	22-02-201018-02-201017-02-2010

Dubai World – A long road ahead

by Sam Kiri

While most world economies show signs of revival from the recent financial turmoil, cracks are appearing at some state controlled investment vehicles. This became evident when Dubai World sought a debt standstill agreement to extend maturities of its debt, particularly a $3.52 billion of Islamic bonds due on December 14 from its property unit Nakheel PJSC. The panic that ensued not only raised doubts over Dubai’s financial health but also over the much heralded recovery prospects of the world economy. Dubai World is still not out of the woods.
 
Dubai World is a state-controlled conglomerate with interests in Transport & Logistics, Maritime, Urban Development, Energy and Investment & Financial Services. Its portfolio includes DP World, one of the largest marine terminal operators in the world, Economic Zones World which operates several free zones around the world and Nakheel, the property developer behind projects such as The Palm Islands. Its subsidiary, Istithmar World, is the group's investment arm that has investments in finance, leisure, aviation and real estate.

Dubai World is a classic example of a state undertaking prestigious but less than financially viable ventures heavily financed through debt. Making Dubai one of the world’s leading financial, ports and entertainment power house was a long standing ambition of its ruler, Sheikh Mohammed Bin Rashid Al-Maktoum. Projects undertaken by the Dubai government include the world’s tallest tower (Burj Dubai) and the biggest man-made islands (The Palm Islands), all at colossal costs financed extensively through debt. Clearly, these projects have failed to generate the income anticipated to service debt.

Dubai was not spared from the global financial crisis and its real estate market was one of the worst hit sectors. While no official estimate of Dubai World’s total assets is available, it is certain to have taken a massive hit. The standstill agreement from creditors is an inevitable response to a deteriorating balance sheet with massive liabilities financing assets which are rapidly falling in value.

The exact amount of total outstanding liabilities is not quite known but is estimated to be close to $80 billion. This however appears to include non interest bearing liabilities such as trade creditors. Based on our independent inquiries including sources in Dubai we estimate total interest bearing liabilities to be approximately $45 billion. Given below is a thumbnail sketch of some of the outstanding debts and their approximate maturities.

Currently Dubai World is seeking to reschedule the immediate $3.52 billion sukuk debt (an Islamic bond) that matured on December 14, 2009 until at least May 30, 2010. Another $1 billion Nakheel sukuk is due to mature in May 2010. In addition, there are two other debt obligations maturing in 2010, namely a $1.2 billion loan from Limitless and a $2 billion loan from Dubai World Group Finance. Total sukuk and other debt obligations that mature is 2010 is approximately $7.7 billion. Unless it secures a financial lifeline, Dubai World may seek further extensions for some of its maturing debt obligations in 2010. 

Few days after the announcement of the debt standstill attempts by Dubai World, Abu Dhabi came to the rescue of Dubai with a $10 billion loan. The move provided some respite to panic stricken world markets. With some 92.2 billion barrels of proven oil reserves and 214.4 trillion cubic feet of proven natural gas reserves (as of January 1, 2009), Abu Dhabi has deep pockets. Abu Dhabi’s support at a crucial juncture indicates its intent to help the battered Dubai economy.
 
Dubai World’s financial woes do not necessarily mean that the Dubai economy is in dire financial turmoil. Although Dubai World is owned by the Dubai government, none of its loans are government guaranteed or sovereign issues. A default by Dubai World, even if it indeed happens, does not require the Dubai government to step in pay up those obligations.

Dubai World’s debt crisis however reveals the extent of financial turmoil in Dubai. It also makes it important to evaluate Dubai exposure by regional as well as foreign banks. If Dubai World episode is anything to go by, an increase in loan loss provisioning may be in store for some banks with operations in Dubai. According to the Emirates Banks Association, Emirates NBD P.J.S.C. has the highest loan exposure with AED 190 billion (US$51.7 billion) as of December 31, 2008. HSBC and Standard Bank are the largest lenders in Dubai among foreign banks.

 

Episodes similar to Dubai World may surface in the Gulf Region as there are other companies that have amassed considerable debt particularly on real estate projects. For instance, Saad Group and Ahmad Hamad Algosaibi & Bros Co., two Saudi Arabian conglomerates, have defaulted on an estimated $20 billion debt to some 100 banks. According to the UAE central bank, UAE banks have an estimated $2.9 billion to the two conglomerates. There are other real estate developers particularly in Dubai facing severe financial difficulties. Banks with UAE exposure are heading for a tough time in 2010, with widespread loan loss provisioning in store.

The financial woes of Dubai World indicate the fragile nature of Dubai economy. Unlike Abu Dhabi, Dubai does not have oil riches and its economy largely depends on trade, manufacturing and real estate. As credit dwindles, these sectors may continue to suffer thus further depressing property values as well as Dubai capital markets. Revival it appears would prove to be a function of Abu Dhabi’s generosity towards its one glamorous neighbour rather than a fundamental strength in Dubai’s economy itself.

Register here to be notified of future Proactiveinvestors articles.