Some of the big name Dubai companies that ran up massive debts during the downturn should have been allowed to fail, but the culture was that bankruptcy was seen as a taboo option, a close former advisor of Dubai’s Ruler told Arabian Business.
“There were a lot of the discussions in 2009 and 2010 where with some companies it actually made sense to let them go through a bankruptcy liquidation process because frankly it would have cost the shareholders less and cost the bank less,” said Sameer Al Ansari, who served as Group Chief Financial Officer for The Executive Office of Dubai Ruler Sheikh Mohammed Bin Rashid Al Maktoum, and was the founding chairman and CEO of Dubai International Capital, the emirate’s defacto sovereign wealth fund.
Dubai’s rapid growth and investment in overseas assets and lavish local projects meant it was one of the locations hardest hit by the global recession as property prices fell by nearly 60 percent, around half of projects were put on hold and it was faced with billions of dollars in debt repayments.
Dubai World, which had invested in a range of trophy projects such as Las Vegas’ biggest ever casino development, the iconic QE2 ocean liner, Barneys New York Canadian and dance troupe Cirque du Soleil, drew global headlines in 2009 when it announced a standstill of its debt obligations.
Around the world, iconic names such as Lehman’s Brothers were allowed to collapse and companies such as General Motors entered into Chapter 11 bankruptcy proceedings in a bid to restructure their debts but Al Ansari said he believes this didn’t happen in Dubai as the consequences were unknown and the culture at the time was that failure was not an option.
“If you allow one to fail it is not just about that company or that institution, it is about the knock-on effect. If we could have allowed that to happen what would have been the impact on Dubai’s reputation and what would have been the impact on other government entities and the impact on the banks. You have to take all those things into account. When you have an organisation ring-fenced the impact is ring-fenced. In this case, it was more complicated.”
One of the reasons companies such as Nakheel, the government-backed firm which built iconic palm-shaped projects off the coast of Dubai and became engulfed in a mountain of debt, were not allowed to fail was because bankruptcy was not even considered as an option.
“Sometimes [companies in the West] voluntarily go into Chapter 11 as it makes sense to do so. In this part of the world, to have gone through any bankruptcy procedures or be declared bankrupt or anything like that is taboo. People in this region would do everything possible to avoid bankruptcy and liquidation so it is a cultural issue.”
However, Al Ansari said this was not been rectified and a long overdue bankruptcy legal framework is close to being introduced in a bid to change his mindset.
“We had a workshop on this with some of the law firms and judges. I think a bankruptcy law is very important for this country... From what I know we made very good progress in getting there.
“It is not published yet, we are getting there and I know there is a lot of focus on it and the realisation that it is very important... Entrepreneurs and small businesses need to know where they stand when things go wrong. It is important and there is a good focus on that today.”
The government set up the Dubai Financial Support Fund, which was created to distribute $20 billion of aid from Abu Dhabi and almost five years after the worst of the recession, many of Dubai’s largest companies are now starting to manage the debts they built up during the boom era.
Nakheel announced a AED60 billion ($16.33 billion) financial restructuring in 2011 – made up of AED32 billion in government funds, AED19 billion in trade creditor debt and AED8 billion in bank debt – and this year confirmed plans to start early repayment of its debt obligations.
Similarly, Dubai World signed the final agreement with all 80 of its creditors to restructure nearly $25 billion in debt, which would be divided into two phases.
Dubai Holding, the global investment holding company, also restructured its heavily-indebted financial services arm, Dubai Group, and reached final agreement with all financial lenders regarding the restructuring of approximately $6 billion loans.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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