A quick perusal of the risk factors section in the Nakheel ’09 bond prospectus shows investors were warned about many things.
Firstly, Dubai World, the parent company of Nakheel, “is not required to, does not, and has no current intention in the future” to publish any financial accounts or statements under UAE law. The company was “a newly formed entity and [had] no operating history.”
Secondly, the strategy of the company is premised on the idea that property prices will keep going up.
The growth strategy of the Co-Obligor Group is based on certain assumptions relating to, inter alia, economic conditions, market for real estate and demographic conditions in Dubai. Although the Co-Obligor Group has no reason to believe that these assumptions are inappropriate, it cannot be excluded that these assumptions may turn out to be incorrect.
Since the inception of the Co-Obligor Group, the demand for residential or commercial property in Dubai has increased substantially. Part of this demand has been based on speculation that the demand for residential property in Dubai will continue to grow which may rely on, amongst other factors, the continued economic growth of the UAE, continued political stability in the UAE, foreign investment continuing to grow in the UAE and the stability of foreign exchange rates. If this demand does not materialise, it could have a material adverse effect on the Co-Obligor Group’s business, financial condition and results of operations.
And thirdly, if the whole development sinks into the sea, then tough luck.
Some of Nakheel’s developments are being constructed on land that is being reclaimed from the sea. For this purpose, Nakheel has entered into contracts with recognised experts. These contractors operate in a specialist field where there are few companies capable of carrying out the reclamation work. At the present time, Nakheel does not foresee any material issues regarding the ability of existing contractors to comply with their obligations under their contracts although if circumstances change it could have a material adverse effect on Co-Obligor Group’s business and financial condition.
All reasonable enough. But, as readers in the Long Room have pointed out, the prospectus does not make clear that the perceived creditworthiness of Dubai, and by extension Dubai World and Nakheel, is dependent on an implicit guarantee underpinned by its membership of the Emirates club.
Even if the perilous state of its finances may not have been clear at the time of issue, one might have expected this point to be made more explicitly in the prospectus.
“Impicit” is the key term here. The prospectus makes clear that “the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World”. But investors, no doubt, would have viewed things differently.
Dubai received a $10bn bailout from its once fierce rival Abu Dhabi in February, and is now at the mercy of its neighbour if it is to refinance its debts.
It now needs to repay $4.3bn by the end of the year, and a further $4.9bn in the first quarter of 2010, according to Bloomberg. If Abu Dhabi steps away, a default is likely.
There is, however, a general section on political risk which should prevent any wranglings over the matter:
No assurance can be given that the UAE government will not implement regulations or fiscal or monetary policies, including policies, regulations, or new legal interpretations of existing regulations, relating to or affecting taxation, interest rates or exchange controls, or otherwise take actions which could have a material adverse effect on the business, financial condition, results of operations or prospects of Dubai World and each Co-Obligor.
Caveat emptor indeed.
Related links:
The emirate has a lot of explaining to do – FT
London unnerved by Dubai debt woes – FT
Dubai World to address investors – FT