This is starting to get interesting. One of the problems of doing business in the Middle East is that the the boundary between the private business of the ruling families and state matters is often murky. Dubai World is forcing a some clarification, and the line is being drawn to cut off the real estate developer.
We had noted last night that the Abu Dhabi backstop was limited to banks, and thus appeared to exclude Dubai World. The Dubai action presumably reflects the stance of Abu Dhabi.
The implication is that other “commercial” developments that might have been assumed to be state backed will be seen in a different light.
From the Financial Times:
Dubai’s government will not guarantee the debts of Dubai World, the state-owned holding company struggling under the weight of $59bn in liabilities, arguing that lenders were mistaken to think that there was sovereign backing.
Abdulrahman al-Saleh, department of finance chief, said creditors were responsible for their own lending decisions and should differentiate between companies and the state.
“Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct,” Mr Saleh said.
Mr Saleh’s comments underscored the government’s intention to cut Dubai World adrift and raised questions over whether it would distance itself from other parts of the emirate’s commercial empire.
Dubai World on Monday night unveiled details of how a restructuring of its debt might proceed.
“The total value of debt carried by the companies subject to the restructuring process amounts to approximately $26bn, of which approximately $6bn relates to the Nakheel sukuk [Islamic bonds from the property arm],” a company statement said.
“Initial discussions have commenced with the banks of Dubai World and are proceeding on a constructive basis,” it said. The efforts would not include other firms, which it said were financially stable, such as Infinity World Holding, Istithmar World and Ports Free Zone World, which includes DP World , Economic Zones World, P&O Ferries and Jebel Ali Free Zone, or JAFZA.
In a note to clients, RBC Capital Markets said Dubai World bondholders had “almost no legal legs to stand on” to recover the value of their investments from the government in the event of a default.
“We now have to look at each Dubai entity on its own merits and cash flows,” said one other banker. “The mood is really crummy, and it’s not just Dubai government risk, we have to be worried about healthy corporates with exposure to companies like Nakheel [Dubai World’s property arm] too.”…
Rachid Mohamed Rachid, Egypt’s trade and industry minister, warned that “the Dubai situation will have serious consequences for the region”…
Five-year credit default swaps for Dubai widened on Mr Saleh’s comments, after earlier tightening on UAE central bank intervention announced on Sunday.
Mr Saleh said creditors of Dubai World would be affected in the short term but claimed there would be long-term benefits as the government restructured the business.
Nakheel asked for all three of its sukuk worth $5.25bn to be suspended from trade, while Dubai World paid a coupon on another sukuk issued by the Jebel Ali Free Zone Authority, the industrial park next to Dubai’s largest port.