International markets yesterday demonstrated considerable relief that Abu Dhabi had produced $10 billion for Dubai. The money enabled Dubai World to make a $4.1 billion bond repayment that was due this week. When the company announced a fortnight ago that it intended to postpone repayment on the bond raised to finance Nakheel, its ambitious property arm, the tremors were felt around the world and indeed may have actually triggered the downgrading of Greek sovereign debt.
This is not unfortunately the end of the story. Dubai World still has some $22 billion of debt to fund from much-reduced revenues. It has said that it is going to seek to restructure a large proportion of it. Even had the company not announced its unilateral postponement of repayments on the Nakheel bond when talks with its bankers broke down, an ordered and agreed restructuring would probably have been difficult and expensive. Now it is going to be more complex and costly, especially since at the height of the market crisis, the Dubai government, which owns Dubai World, declared that it was not responsible for the company’s debt.
This had, however, been the assumption of investors. The implicit guarantee, coupled with the dynamic and thrusting image that Dubai had created for itself, was what had drawn the money to the UAE state in the first place. It is however a moot point that investors do not seem to have demanded that such a guarantee be spelt out in the original loan agreements. Elementary due diligence would seem to have required such a provision. Then once Dubai World had announced its payment suspension, the markets began to assume that Abu Dhabi would come to the rescue of its neighbor. This only happened, however, at the eleventh hour.
Despite the general relief at the short-term solution, some bankers are already saying the intervention came too late and serious long-term challenges lie ahead. It would seem that Dubai World was very poorly advised, both in its actions and in the way they were presented to the markets at a time of inherent global nervousness. The upshot has been a spread of perceived higher risk, not just in Dubai where, for instance, four banks have had their ratings cut but also in the wider Gulf. As a result, it will be harder for many regional borrowers to access the markets competitively. It is also a pity that it was an Islamic finance bond, a sukuk, that was involved in the crisis. This must inevitably dent the standing of instruments, which many Islamic financial professionals insist are an attractive and ethical alternative to standard interest-bearing debt. Indeed sukuks have drawn very substantial flows from Muslim investors.
Much will now depend on how Dubai World handles itself and seeks to rebuild its reputation in markets that are already jittery and looking for exits. It is by no means an impossible task. It will, however, require far better coordination and the higher degree of transparency that international banks and investors are demanding.
