Dubai, the financial, economic and commercial cornerstone of the United Arab Emirates (U.A.E.), is known for its remarkable ambition and ability to break records – from the world’s tallest building (the Burji Khalifa), to the largest shopping center (The Dubai Mall), to the busiest airport (Dubai International), in addition to some of the world’s most complex debt restructuring operations.
Accumulated over 5 years since the global financial crisis, and compounded by the plummeting oil prices since June 2014, the total debt racked up by the Emirate now exceeds $140 billion, equivalent to about 132% of the country’s Gross Domestic Product (GDP), a percentage that deserves attention, since the maximum perceived safe debt-to-GDP ratio is 70%. The debt has amassed due to the financial obligations piled up by “government-related entities” (GREs), which are partially or totally owned by the government and used as means to implement policies and deliver special services to the population. In Dubai, the most important GRE is arguably Dubai World (DPW), traded on the Nasdaq Dubai Exchange. It is an investment company that manages and supervises a diversified business and projects portfolio with the primary aim of promoting Dubai as the world’s international business and leisure capital.
Dubai World’s debt story began in 2009, in the wake of the financial crisis, which had detrimental impacts on the real estate market, with housing prices declining by 50%. At the time, the government-controlled holding shocked global markets by asking for a standstill on the $25billion burden, which had arisen from borrowings to finance projects and investments, in addition to aving the muster to request refinancing at a time of such turmoil. It was the timely intervention of the government of the neighbouring Emirate Abu Dhabi, with the injection of $20 billion, which prevented Dubai World from collapsing. Since its debt was still not fully extinguished, in 2010 Dubai World reached a first restructuring agreement for the payment of its liabilities that, in the meanwhile, with the sale of some assets (including hotels and an industrial park), had decreased to $14.6 billion. The conglomerate agreed to pay off $4.4 billion by 2015 and $10.5 billion by 2018, but the promise did not last for long.
Last December, the government-owned holding requested a new arrangement of the debt payment, reaching a second major restructuring in only 4 years. Under the new payment framework, creditors, who signed so-called “lock-up agreements,” will receive in 2015, an early repayment of the former sum, that has declined to $2.92 billion after selling some further assets, and, by 2022, the latter sum (supposed to be paid by 2018), which still amounts to $10.5billion. In spite of another extension of the burden of the debt, creditors, most of which are banks (HSBC, RBS, Standard Chartered, Abu Dhabi Commercial Bank, Emirates NBD), will be refunded with improved terms. Dubai World indeed offered a 1% increase on the $10.9 billion portion of loan and a 0.25% increase in payment in kind interest in the latest plan, Bloomberg reports.
The new deal has been possible through the implementation by the Dubai World Tribunal, of “Decree 57,” a special law issued in the wake of the financial crisis to help government-owned enterprises to successfully handle the considerable amounts of debt built up during the meltdown. Specifically, the legislation supplies government-related entities with the possibility to secure a new arrangement of the payments due, provided that “a substantial majority” of their creditors (at least 67% in agreement). The law thus forces the disagreeing minority, which still counts for approximately 33%, to accept the deal, in a technical process known as “cramdown.”
The deal constitutes a “win-win” outcome for both parties. In fact, Dubai World will have more time to maximize earnings from the disposal of its non-core assets, whereas creditors will achieve favourable credit terms sooner than expected. The restructuring operation will play a pivotal role for Dubai on the whole as well, contributing to a significant ease of the financial pressures on the city, which keeps conducting a massive investment programme in view of the hosting of the 2020 World Expo, that analysts estimate will cost between $8 and $9 billion.
The financial-economic scenario in the Emirate is not all “sunshine and roses” though. In fact, investor sentiment towards the Middle East city has been further jeopardized after another state-owned firm, Limitless, defaulted on a $400 million payment due in 2014. In the same way as Dubai World, Limitless is trying to restructure a heavy debt load ($1.2 billion), and is seeking the support of all the creditors. The problem for Dubai is that its debt position is, as said, worsened by the fall in oil prices. Although the city does not rely on oil revenues, it is indirectly exposed to them because state-backed companies depend heavily on fees generated from corporate activity, which is, of course, directly affected by the decline in oil prices. Hence, the longer oil prices remain low the more likely are GREs to struggle to repay debts. Even though Dubai is expected to attract some 25 million visitors with the global Expo, the government of the city is believed to be borrowing astonishing amounts for the preparation of such event, aspect that would further compromise Dubai’s indebtedness.
The debt affairs of Dubai’s government and its controlled entities clearly shows a reluctance to incentivize minority creditors, and a preference for the lending support of local banks to overcome any opposition. This might be a particularly risky strategy to adopt. In fact, it might help a company in the short run by guaranteeing a relatively smooth completion of deals, but in the long run it might result in reputational hazards, particularly dangerous in view of potential future debt restructuring needs. A much more careful debt management strategy should thus be designed and executed, if Dubai is to maintain a strong backing from all of its creditors and continue making its ambitions reality.
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