Dubai’s debt move

Words of confidence from Dubai policymakers may not convince investors anxiously awaiting the fate of Nakheel’s $3.5bn Islamic bond, and the next installment of the emirate’s $10bn bailout fund. Natsuko Waki and John Irish report.

Dubai’s move to repay and restructure some of its $80bn debt and a show of support from policymakers may not be enough to convince sceptical investors that the emirate could pay back its bond obligations.

Successful debt restructuring is essential to prevent the debt-laden Dubai — already bailed out by the federal government once — from defaulting and cutting off overseas financing channels for the emirate whose six-year oil boom burst last year, causing a big crash in the property market.

Property developer Nakheel, part of state-owned conglomerate Dubai World, has repaid a $1.2bn securitised bond a month ahead of its maturity date, according to two bankers familiar with the deal.

Furthermore, the Dubai government is launching bond roadshows in Europe, Asia and at home in a move seen to test investor appetite for fresh financing. Dubai International Capital, a subsidiary of Dubai ruler’s investment vehicle, has launched syndication of a $550m loan.

While these developments signal a step in the right direction, the fate of Nakheel’s $3.5bn Islamic bond due in December and Dubai’s upcoming $10bn support bond as well as even more maturing debt next year are the main remaining issues for investors.

“Restructuring will take quite a while. All hinges on how far markets will recover. There is a lot of debt maturing in 2010 and that will be a challenge for Dubai,” said Eckart Woertz, programme manager of economics at Gulf Research Centre.

“They need to find refinancing and try to keep cash generating industries. They will try to reprioritise; where assets and companies are under water you need to try to cut back or they might think about exit strategies.”

Hit by the credit crisis and liquidity crunch, developers in Dubai cancelled or postponed multibillion-dollar construction projects with property prices halving since last year. In prior years Dubai had expanded rapidly its activities in logistics, financial services, property, luxury retail and tourism.

Dubai’s benchmark index rose 1.4 percent on October 19, helped by optimism for Nakheel’s debt restructuring, while prices of Nakheel’s $3.5bn sukuk maturing on December 14 rose to 106 from a low of 103 late last month.