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Wed 25 Nov 2009 05:29 PM

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Deal sought on Dubai World, Nakheel debts

UPDATE 3: Cost of insuring Dubai's debt against default soars, DP World not included in restructuring.

Dubai will ask creditors of two of its flagship firms for a standstill on debt worth billions of dollars as a first step towards restructuring Dubai World, the conglomerate which spearheaded the emirate's growth.

The government's announcement on Wednesday, which said consultants Deloitte had been appointed to help with the restructuring, sent the cost of insuring Dubai's debt against default soaring and bond prices tumbling.

State-run Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai's total debt of $80 billion.

On Thursday, the government confirmed that DP World and its debts would not be included in the restructuring process for Dubai World.

Analysts expect financial support from Abu Dhabi to continue but Dubai will likely have to abandon its economic model that focused on heavy real estate investment and inflows of foreign capital.

"It's shocking because for the past few months the news coming out has given investors comfort that Dubai would most probably be able to meet its debt obligations, and most analysts were of the view that Nakheel's commitments would be met," said Shakeel Sarwar, head of asset management at SICO Investment Bank.

"Abu Dhabi has been supportive of Dubai, but it appears this support is not enough for Dubai to meet its obligations on time."

The government said in a statement: "Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010."

Nakheel, developer of iconic palm-shaped residential islands owned by Dubai World, has a $3.5 billion Islamic bond maturing on December 14 and debt worth $980 million due on May 13, 2010. Limitless, another Dubai World developer, has a $1.2 billion bond maturing next March 31.

The cost of insuring Dubai government debt against default with five-year credit default swaps soared, jumping over 100 basis points to 420.6 from a close of 318 a day earlier. Nakheel's Islamic bond prices fell more than 20 points to 87.

"The market had expected a timely repayment of the $3.5 billion sukuk and spreads had narrowed," said Eckhart Woertz, economics programme manager at Gulf Research Centre.

"The standstill request comes as a surprise, especially after additional finance from Abu Dhabi has been raised."

Dubai's economy was hit hard as the global credit crunch over the past year ended a six-year boom in the region and sent the emirate's once-flourishing property sector into decline.

Last weekend, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, reshuffled the board of the Investment Corporation of Dubai, which manages his wealth, and changed the chief of the Dubai International Financial Centre.

The reshuffle, which removed boom-era leaders from key positions, was widely seen as a shift towards more conservative stewardship of Dubai's resources.

Dubai's announcement on Wednesday shook the confidence of investors in government debt elsewhere in the region; credit default swaps for Abu Dhabi, Saudi Arabia and Qatar also rose, by more modest amounts.

Investor confidence in Saudi Arabia has been hit this year by up to $22 billion of debt restructurings at the country's Saad and Algosaibi groups.

In another move on Wednesday which the government said was not connected to the Dubai World restructuring, Dubai raised a further $5 billion as part of a $20 billion bond programme launched this year. The $5 billion was half of what it had previously said it would raise.

The $5 billion tranche, with a maturity of five years and paying 4 percent interest, was placed with two Abu Dhabi-controlled banks, National Bank of Abu Dhabi and Al Hilal Bank, officials said.

The first $10 billion tranche in the programme was taken up by the UAE central bank earlier this year as Dubai sought to raise funds to support state-linked companies.

But few details have been disclosed about what Dubai has done with the initial $10 billion and how it plans to use the latest $5 billion. (Reuters)

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Ali Kanda 10 years ago

I am frankly tired of all this negative news. Why you are wasting time to tell all this rubbish. Dubai World is to be having the most wonderful investments and Nakheel building munificent buildings, I am proud to have been part of this organisation and assisted to do the needful in borrowing money from all banks and every banks arounds the world. The banks of the world are now too greedy to be wanting back the cash, I think they have to wait like the government is telling them and then the most respectful can be paid back firstly. I would not advise to pay american or british banks one penny as they have taking all the time from our leaders pockets and not to have made any good loans advices Thanks you

Mohd 10 years ago

We have full confidence in Nakheel and Dubai and this company is too big to fail. I am sure they will find amicable solutions for sukuk holders.

European 10 years ago

I am absolutely shocked reading your comment. You are showing some total lack of reality.... Nakheel should start paying back their creditors immediately as already quite a few contractors have gone bust, or could not pay their workers, because Nakheel did not pay them. I would want to see your reaction if you were in their (the contractors or the workers) shoes. I suppose you would not mind if your employer would not give you your monthly pay !!!

Sandjockey 10 years ago

Let's focus on the core of the article, which is that Dubai World (including Nakheel) is re-organizing and asking their creditors to delay any action on debts until May 30 2010. This type of request isn't uncommon for companies that are in financial distress and, quite often, the creditors will honor the request if it appears that the debtor is on the way to getting the required monies (whether via additional financing or further cash investment). What is not said but is even more interesting is that the restructuring will further reduce the jobs at Dubai World, will likely consolidate some entities, and will most assuredly require the cancellation of projects. I don't believe that Dubai is crashing but it is being lowered back to reality levels. SJ

Axon Sax 10 years ago

It amazes me to see postings on here that say "I am frankly tired of all this negative news" and "I would not advise to pay american or british banks one penny" - WAKE UP AND SMELL THE COFFEE - The Emirate is in debt and is trying to restructure loan payments. No great shame in that and nothing to get so defensive about. Open your eyes and have some respect.

Jahangir 10 years ago

Dubai can reverse its fortunes by getting back to Dubai by allowing investors a 5 year residency visa . Long live the great Dubai .

gordon 10 years ago

If the debt owners have agreed to a standstill, then negotiatons are one way. If they have however no agreement then they are in default, ie bankruptcies. This puts into question the cost of credit default pricing, the stability of sovereign debt, the transparency of information being given to the press. Now the big problem is going to be ale to raise money for mortgages, international credit markets. How will the government raise money? taxes? higher fees? This is not painting things black, this is standard economics...

Paddy 10 years ago

The question remains what exactly is being restructured in DP World. Is there going to be consolidation among group companies? What is the group's plan to repay the debts? Is it going to launch new projects? How does it plan to raise the money to repay the debts? I dont think its prudent to borrow more to pay off the existing debts. Its just like using one credit card to pay off another one. The debt remains there, only the creditors are changed. Unless the group has internal accruals to pay off debts on a regular basis, its going to be tough. Positive cash flows have to be generated on a continuous basis. Borrowing more money will become extremely tough as well as expensive. It cant bank on Abu Dhabi for ever. But will the launching of more projects help? Dubai is now facing a glut of new housing units and the oversupply is expected to continue through 2010 also. Given this scenario, will there be buyers for Nakheel's premium housing units? Searching for answers.....

ExpatHog 10 years ago

This is a positive move forward for Dubai .Restructuring is a sensible approach and hopefully will lead to a leaner and more efficient organisation. Now all they need is to get the support of the western banks and encourage fdi into Dubai .

ahmed 10 years ago

As things stand, we need to get over the negative news.And no need to worry by the American and British banks.Dubai and Abu Dhabi are like 2 brothers, and AD is the elder brother.For sure it will not let Dubai down.We are United in every sense.