Investor anger mingles with frustration in Dubai

The surprise announcement of Dubai World’s debt restructuring sent global stock markets tumbling when they opened on Thursday.

But the reaction in the emirate itself was no less dramatic. Anger mingled with frustration as bankers and analysts tried to digest the implications of Wednesday’s announcement that Dubai World, the government’s flagship holding company, was seeking a “standstill” on its debt.

Investors had, in recent months, been reassured by Dubai officials that the emirate would meet all obligations on its $80bn (£48bn) of gross debt. But the Dubai World announcement raised the spectre of default in the Middle East’s trading hub just as early signs of economic recovery had emerged.

“The credibility of these guys has been found wanting. Whether there is a default or not the biggest issue is going to be credibility,” said one senior analyst at an international bank, who had been talking to international and local clients overnight.

“There is some suggestion that Dubai may have wanted to go it alone but you don’t go it alone when, rightly or wrongly, you have this bellwether bond payment falling due,” he said, referring to a $4bn payment due by Nakheel, a real estate developer, next month.

That frustration intensified on Thursday when Nakheel bondholders tried to discuss what their joint strategy should be only for the planned teleconference to be cancelled because it was oversubscribed.

When global markets reopened on Thursday – the Dubai exchanges are closed for the Eid holiday – investors responded by moving in to less risky assets, with falls on European exchanges. London’s equities markets were also caught in the shockwave, with financial stocks hit hardest.

Dubai World has developed some of the world’s most extravagant real estate projects but it is now seeking a restructure of its debts – the most immediate of which is the $4bn that matures next month on the sukuk (Islamic bond) of Nakheel, its troubled development arm.

A senior UAE banker at an institution with exposure to Dubai World said he had received no information from the company, and described the notion of standstill as a “disaster” for confidence.

Bankers reported concerns, especially from US investors, about confidence in the emirate. Rubbing salt into wounds, investors cannot get out of positions until Monday as the UAE has closed down for the Eid religious holiday.

Local businessmen were as concerned by the news as international markets. “I was interviewing someone for a job last night and felt ashamed,” one local banker said on Thursday.

Dubai World, which invested in global real estate and casinos, as well as developing extravagant real estate projects at home, has long been the biggest thorn in the side of Dubai’s attempts to extricate itself from financial straits.

The group, controlled by Sultan bin Sulayem, a close advisor to the ruler, has frustrated creditors with its slow restructuring process.

The conglomerate shed staff and sold some assets but failed to take firm action on its gaping debt pile.

Advisors have been preparing a plan of action on its most important liability, the Dubai World-guaranteed Nakheel sukuk. But political infighting around the ruler’s court and sclerosis at Dubai World saw the fateful decision to limit government support for the entity pushed back until less than three weeks before the maturity date.

The impact on the rest of Dubai’s debt pile could also be stark if confidence in the emirate’s financial management is shaken.

The department of finance on Thursday clarified that DP World, the ports operator, was not included in the restructuring process. Bankers have long expected the profitable global business to be ring-fenced from the parts of the holding company subsumed by the financial crisis, such as Nakheel and investment company Istithmar.

On the same day that the Dubai government indicated that support for Dubai World was not as strong as investors had expected, and it was willing to countenance an effective default on a strategic provider, the city’s utilities provider said it wanted to raise up to $2bn.

Next year, the emirate needs to repay $13bn-$17bn to banks and bond holders.

“Dubai can’t keep pouring money into the sand,” said one banker.

Source FT.com http://www.ft.com/cms/s/0/e3da189c-da63-11de-9c32-00144feabdc0.html