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Wed 7 Dec 2011 07:57 AM

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Dubai may use sovereign wealth fund to repay debt

Gulf emirate faces challenges of big debt repayments via trio of state-linked firms

Dubai may use sovereign wealth fund to repay debt
Jebel Ali Free Zone (JAFZA) is among the firms seen as having the highest refinancing risk

Dubai, which
narrowly averted a bond default in 2009, could use money raised by its
sovereign wealth fund to help repay $3.8bn in bonds owed by state-linked firms
which mature next year, a source familiar with the matter said on Tuesday.

The Gulf Arab
emirate has clawed its way back from the depths of its debt crisis, helped by
an economic revival in trade and tourism and its safe-haven status amid the
Arab Spring revolts, but still faces the challenge of big debt repayments.

The source said
discussions in government circles focus on $3.8bn in bonds due next year from a
trio of state-linked firms which are seen as having the highest refinancing
- Dubai Holding Commercial Operations Group (DHCOG), part of the ruler's
private holding company, DIFC Investments (DIFCI) and Jebel Ali Free Zone

The Investment
Corporation of Dubai (ICD), the emirate's sovereign wealth arm, which is run by
a key figure tasked with resolving Dubai's debt mess, may be involved.

"All options
are still on the table for the bonds. Could be refinanced, could be paid back
by ICD partially," the source said, speaking on condition of anonymity.
"ICD would use funds that it raised [recently]."

"It has raised
$1.5bn in bilateral loans and is aiming for $2bn, it's mostly from local

ICD holds about
$70bn in assets and its financial position is bolstered by dividend payouts
from its portfolio of companies. Its investments include successful airline
Emirates, bank Emirates NBD and Dubai Islamic Bank .

A government
official suggested that all paths were being considered including a

"As you know,
the Dubai government has previously paid some [debt] and refinanced some and it
might be the same again," he said, on condition of anonymity.

The Financial Times
said on Tuesday that Dubai had raised the prospect of restructuring some bonds
and is pursuing other options to help state-related entities meet their

Those include
raising $2bn in funds from liquid local banks, the newspaper said.

"We are working
hard to meet all our liabilities but times are different. We are more confident
we can negotiate a commercial deal with bondholders," a senior government
official is quoted as saying in the article.

Dubai's main share
index was down 1.2 percent with some traders citing worries over the
restructuring possibility.

Dubai has negotiated
terms to restructure some $41bn of debt related to its flagship conglomerate
Dubai World and its property arm Nakheel, and other state-linked firms have
been refinancing loans over the past two years.

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But it has been
careful to pay bondholders in full upon maturity and restructuring such issues
would be a departure, possibly signalling the depleted resources left in its
financial support fund for Dubai Inc, as the matrix of state-linked firms are

"Dubai has put
a substantial amount of effort into restoring its credibility," said
Chavan Bhogaita, head of markets strategy unit at National Bank of Abu Dhabi.

high profile bonds from the likes of Jafz, DIFCI and DHCOG would simply
undermine all these efforts and possibly take us back to late 2009, early
2010-type sentiment. In our view, it doesn't make sense to do this."

A more likely scenario
is that Dubai is floating a trial balloon and laying the groundwork for a debt
swap on some maturities as an option.

In December 2009,
Abu Dhabi stepped in with a last-minute lifeline to help Dubai avert an
embarrassing default on a Nakheel Islamic bond. It subsequently paid off
Nakheel's 2010 and 2011 bonds in full upon maturity.

Dubai stunned global
markets in November 2009 when it sought a standstill on $26bn in debts related
to Dubai World. It struck a deal with banks last year, promising full repayment
on the principal in five to eight years.

All three major bond
maturities due next year trade at a deep discount to par, suggesting investors
place a massive premium on the bonds to reflect the potential risks associated
with timely and full repayment.

"We believe it
is DIFCI that is most likely to rely on direct government support in
conjunction with refinancing its maturing debt obligations in 2012,"
ratings agency Moody's said on Tuesday, noting the Dubai government is directly
exposed to DIFCI, which runs the city's financial freezone, having given it two

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