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Sun 6 Dec 2009 04:00 AM

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Diagnosis debt

What does the news of Dubai World mean for the emirate's future?

Diagnosis debt
Diagnosis debt
Investors could be attracted to the emirate by the prospect of a fire sale of assets, as spooked owners look to claw back quick cash amid the uncertainty.
Diagnosis debt
Diagnosis debt
Dubai has much work to do; after the harsh realities of the debt restructuring, restoring the perception of the emirate as a place to do business perhaps represents the government’s greatest challenge.

Dubai World shook the financial world when it announced that it is asking creditors for a standstill agreement on its multibillion-dollar debt. But beyond the global media frenzy, what does the news actually mean for the emirate's future?On the morning of Wednesday November 25, one of Dubai's many five-star hotels hosted a genial breakfast debate entitled ‘Coming out of the Recession'. Attendees helped themselves to croissants and fresh fruit, as a panel - which included bankers, business leaders, and journalists - set a mood of distinct optimism.

"There is a recovery in place and it will be driven by the dynamic nature of Dubai's economy," one well-respected economist assured the floor, to nods from his fellow panelists. "We have had the recession, we have had the correction, we have seen housing market fall. We have seen that happen already - that is the 2009 story."

The optimism did not last long. Later that same day came the news that no-one expected, and which sent ripples of panic around the globe.

On the eve of the Eid Al Adha religious festival, the Dubai government announced that one of its main investment vehicles could not pay its bills as scheduled.

Dubai World asked creditors for a "standstill agreement" to May 2010, as it sought to restructure debt to the tune of $26bn at Dubai World and property developers Nakheel and Limitless.

Moody's and S&P immediately cut their ratings for Dubai-based government related entities and placed them on credit watch, with negative implications. Share prices in Asia and Europe fell, Wall Street saw losses, oil prices tumbled, and the dollar rallied in reaction to increased risk aversion and the exposure of international banks to Dubai's debt. And while Gulf bourses were granted an initial reprieve as a result of the four-day holiday, they slumped dramatically upon reopening.

"This kind of event clearly hits investor sentiment, and has had a huge impact on risk appetite, which had been very robust so far this year," says Fahd Iqbal, GCC strategist for the Egypt-based investment bank EFG Hermes. "I expect selling to continue until some indication is offered by the Dubai authorities on the route they plan to take in the immediate short-term.

"We need to get more clarity in terms of what is going to happen, and what specific [restructuring] option they are going to go with," he continues. "Without that it is difficult to quantify the scale of risk."

This concern is echoed by Ian Munro, head of research at Mac Capital Advisors, a Middle East-based corporate finance house. "The market will remain in free fall until we get any clarity from Dubai World or the Dubai Department of Finance regarding how they are going to restructure the debt," he says.

The emirate has made some efforts to reduce the uncertainty. In a statement to update their lenders on developments relating to its debt obligations, Dubai World confirmed the process would not include 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.

Meanwhile Moelis & Co has been appointed to advise on the Dubai World restructuring with Rothschild, which will continue its ongoing role as financial advisor.

And despite the Dubai government's decision to distance itself from Dubai World's problems - Dubai's Finance Department director general Abdulrahman Al Saleh said the emirate would not guarantee the company's debt - some analysts believe that the reaction to the news in both domestic and international markets has been overplayed.

"Global banks' exposures [to Dubai debt] are a drop in the ocean compared to the toxic assets wiped out during the global crisis," said a note published last week by HC Securities, a Dubai-based brokerage. "The support of the federal government has been incorrectly assessed by the broader market; once this uncertainty has been removed we would expect to see equity markets recover quickly."

"I think the lack of other international news has exacerbated this problem, and Dubai is ever the punching bag of international media," says Munro at Mac Capital Advisors. "The fact of the matter is that this is an extension of debt. Dubai wasn't saying ‘we won't pay it', just that the payment will be delayed."Nevertheless, the HC note did highlight one potential risk with regards to outstanding debt in the real estate sector - the dramatic collapse of which has been blamed for many of Dubai's current woes.

"The degree to which real estate companies have to finish properties that had already been started before investors defaulted on them presents a funding gap or cost in the real estate sector that is yet unknown," warned the brokerage house.

So what does this mean for real estate investment in the emirate? Property owners have already seen price falls of up to 50 percent across Dubai, while recent talk of a recovery in the Gulf real estate market has withered virtually overnight, with analysts talking about a further twenty to 30 percent slump in prices.

"The calls over the [holiday] weekend have been a mixed bag," says Nick Maclean, managing director of CB Richard Ellis (CBRE) Middle East. "Since the first Eid [Al Fitr], we have seen an uptake in [investors] visiting the UAE looking for opportunities to deploy some capital, as they want to get in to take advantage of the readjustment of pricing.

"On the other hand some investors have now said they are going to defer their decision to invest in the UAE, and particularly in Dubai, for the next twelve months," he continues. "They are deferring their decision to come in here until they understand the level of support that will come from Abu Dhabi; conservative investors will not do anything until May next year unless some significant announcement is made."

According to Maclean, some investors could nevertheless be attracted to the emirate by the prospect of a fire sale of assets, as spooked owners look to claw back quick cash amid the uncertainty.

"Non-institutional and opportunistic investors see it as an opportunity because they believe some assets that were not in the market may now be brought to the market, as a result of clients needing to pay short-term debt," he suggests.

Ian Albert, regional director at Colliers International, insists that the gravest threat to the real estate market lies in the tightening of finance opportunities for would-be investors in the sector.

"The issue at the moment is liquidity, and what the banks are going to do," he says. "The fall in prices earlier on this year was to a large degree [caused] by the removal of availability of finance in the marketplace, and so that's the primary concern."

The UAE government has already taken positive steps to reassure investors on this front. The Central Bank has stepped in and announced a facility to provide banks with extra liquidity, which will be available to all UAE banks as well as foreign banks operating in the Emirates.

"The Central Bank saying they have funds available is a good move and a very strong move," says Albert. "If banks were to continue to support the finance into the market I don't think there will be any real significant change over what was predicted [before the Dubai World announcement]. If the banks take advantage of the offer from the Central Bank then liquidity will continue to flow and prices will be supported, subject to the softening of prices we anticipate through the supply [increase] next year," he adds.

Whatever happens in the fragile real estate market, the true ramifications of the Dubai World announcement will take some time to emerge. At EFG, Iqbal warns that the events of the past week represent a "serious impediment" to Dubai's long-term hope of being a financial hub for the region.

"Investor trust and credibility is a very fragile commodity and it does take time to rebuild," he says. "Restructuring is not an overnight process: it takes years."

Dubai will no doubt have to work hard to restore international confidence; after the harsh realities of the debt restructuring, restoring the perception of the emirate as a place to do business perhaps represents the government's greatest challenge.

Speaking to Arabian Business just days before the debt crisis erupted, renowned PR guru Max Clifford suggested that the emirate could do with a change of image.

"I think Dubai needs to have a softer image than it has currently," he said. "Obviously it is spectacular, but it is very much money, concrete, and vast hotels. Everything is money, money, money."

After the events of the past ten days, few would argue with that assessment.

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