Dubai may ‘muddle’ through debt next year: BofA

Dubai, which was on the brink of a default in 2009, may “muddle” through a financing strategy next year as state-linked companies sell assets and refinance debt, Bank of America Merrill Lynch said.

“A perilous exercise of identifying fiscal deficit financing sources may be showing that a mix of domestic banking sector and Abu Dhabi support helped Dubai muddle through so far, and this (opaque) strategy could continue into 2012,” London-based analyst Jean-Michel Saliba wrote in a report.

Dubai’s government last week denied a report that it plans to restructure debt of state-owned companies next year and said it was ready to support them through “various options.”

State-owned Dubai Holding Commercial Operations Group, Jebel Ali Free Zone and DIFC Investments, which have a combined $3.8bn of debt maturing next year, are all facing refinancing risks and may experience “ratings volatility” as they move closer to the maturity dates, Moody’s Investors Service said Dec 6.

The emirate, the Gulf’s trade and tourism hub, was on the brink of a default in 2009 and is recovering after a $20bn cash injection from the United Arab Emirates’ central bank, the Abu Dhabi government and its banks. Dubai and its state-owned companies, excluding finance companies, have outstanding debt of $101.5bn and may need further financial support to meet these obligations, Moody’s said.

 “While a restructuring could help some of the weaker companies obtain more sustainable capital structures, the impact on the rest of the Dubai Inc structure will make it difficult to envisage a default without serious repercussions on the cost of debt to the various other healthy corporates in need of market access,” Bank of America said.

State-controlled companies including Dubai Holding and Drydocks World are still in talks with lenders to restructure debt, while Dubai World reached an agreement with creditors on about $25bn of liabilities in March after roiling global markets in 2009 by seeking to delay payments.