So goes the motto of Dubai’s flag bearer in global investments.
True to our claim “The Sun Never Sets on Dubai World”, our investment portfolio extends across 100 different cities in the world. We are spread across a wide spectrum of strategic industries and sectors ranging from Ports Management, Property Development, Hospitality and Tourism, Free Zone Operations, Private Equity Investment, Retail to sectors as diverse as Aviation, Commodities Exchange and Financial Services.
Right now, however, things are looking rather overcast for the company, whose spending spree (it owns assets as diverse as Barneys in New York and P&O ports in the UK) has left it grappling with $59 billion of liabilities.
Statement released by the Government of Dubai on Wednesday.
Emphasis ours.
The Government of Dubai, acting through the Supreme Fiscal Committee (“SFC”), has authorised the Dubai Financial Support Fund (“DESE”) to spearhead the restructure of Dubai World with immediate effect.
The process has begun with the appointment at the direction of the DFSF of a Chief Restructuring Officer (CRO), Aidan Birkett, Managing Partner, Corporate Finance at Deloitte LLP, to Dubai World. The CRC will work with Dubai World’s executive management team to oversee the restructuring process and ensure the continuity of Dubai World’s operations.
Dubai World has a portfolio of strategically important businesses and the restructuring will be designed to address financial obligations and improve business efficiency for the future. The DFSF, working with the CRO, will start to assess and evaluate the extent of the restructuring required. As a first step, Dubai World intends to ask all providers of financing to Dubai World and Nakheel to “standstill” and extend maturities until at least 30 May 2010.
The $5bn bond announced earlier today by the Dubai Department of Finance and managed by the DFSF is not linked to the restructuring of Dubai World and is meant for the general purposes of the DFSF.
Nakheel is, of course, Dubai World’s real estate division and responsible for this:
Now, traders were expecting the Government of Dubai to use the proceeds of the $5bn bond issue (which is part of the $20bn bond programme the emirate launched earlier this year) to a repay a $3.5bn Nakheel convertible loan, which expires on December 14.
But a couple of hours after the $5bn was raised (from two banks in Abu Dhabi), the Government of Dubai dropped its bombshell as Bloomberg noted:
The Department of Finance said the $5 billion Dubai raised today by selling bonds to two Abu Dhabi government-controlled banks for its support fund “is not linked to the restructuring of Dubai World and is meant for the general purposes of the Dubai Financial Support Fund.”
Which left holders of the Nakheel convert in a state of shock:
All Nakheel Convert Bond Holders have been asked this afternoon to ‘stand back’ from the Dec 14th expiry of a $3.5bn Convert and delay until May 30th. This morning’s new $5bn straight bond from Dubai World meant that people relaxed and believed that this convert would be redeemed without a problem. Needless to say, it traded upto 110. However, since approaching bond holders, the same bond is trading at 80, which represents a $1bn p&l turnaround.
It remains to be seen whether the standstill agreement will be voluntary or coercive. If it’s the later it could have serious repercussions, according to traders because it might be viewed by the ratings agencies as a default. Note also the Nakheel convert is guaranteed by Dubai World, which is a government controlled entity.
No wonder, Dubai’s CDS spread then blew out.
The cost to protect against a default by Dubai surged 111 basis points to 429 basis points, ranking it the sixth highest- risk government borrower, according to credit-default swap prices from CMA Datavision in London. The contracts, which increase as perceptions of credit quality deteriorate, are now higher than Iceland’s after climbing 131 basis points in November, the biggest monthly increase since January.
As for the wider impact on the appetite for emerging market risk – well, this story feels as though it is only just getting going…
Update:
Comment from a senior City economist:
The brief statement announcing the request to creditors included few details but has been read by the market as applying to all creditors, including holders of the Nakheel bonds. It is not yet clear if the “request” is voluntary – a condition that Moody’s said would determine if the credit event constituted default or not. The largest of those bonds, a USD4bn convertible sukuk, is due to mature in mid-December and is guaranteed by the 100% state owned parent company. Dubai sovereign CDS levels widened 150 points to 450bps in less than an hour. The price of the Nakheel-09 bond fell 30 points over the same period; 12m dirham swaps moved 50bps to the right.
Although Dubai’s heavy debt stock and its demanding debt maturity profile has been a widespread concern throughout this year, today’s announcement has caused widespread shock. Dubai’s liquidity has improved considerably over the past three months with the sale of new sovereign paper on to the market appearing to have enhanced its ability to meet its payment obligations.
In particular, there had been clear evidence of support from Dubai’s wealthy neighbour, Abu Dhabi, which had agreed just over an hour before the standstill was announced that its banks would buy a further USD5bn in Dubai government bonds on concessional terms. Because Nakheel’s 2009 bond was widely held and guaranteed by the parent it had seemed far less likely than other paper to be restructured.
The announcement was made as Dubai began a four day religious holiday which is likely to mean that further details emerge even more slowly than is often the case in the emirate. If the fears of the market are realized, however, and Dubai is perceived to have defaulted, the short and long term consequences could be severe for liquidity in the emirate as well as debt and equity assets. The effects could also extend beyond Dubai World as the market fundamentally reassesses their view of the state-dominated economy.
Related links:
Dubai World asks for debt ‘standstill’ – FT
Dubai Debt Woes Turn Ugly After It Seeks Standstill Deal – Dow Jones