On November 25 last year, state-owned conglomerate Dubai World shocked markets with the announcement that it was looking to restructure more than $23bn of debt.
Dubai World, the parent company of the world’s third-largest port operator DP World and of Nakheel, the real estate unit building palm-shaped islands off the emirate’s coast, was forced to restructure $14.4bn of bank debt and $8.9bn of government liabilities.
The company said it would ask all creditors to “standstill” debt maturity on Islamic bonds due in December 2009, for at least six months. And stock markets already feeling the weight of the global economic downturn, reacted accordingly: the Dubai market shed 12.5% of its value and Abu Dhabi lost 11.5% in two days of trading following the announcement.
“The Dubai World default confirmed people’s fears and reinforced what was already a bad situation,” Andrew Charlesworth, Head of Capital Markets for the Mena region at Jones Lang LaSalle, tells AMEInfo.com.
“It was more of a sentiment issue than a physical problem – default is not a unique thing, but it was a much bigger story here because it was the first time it had actually happened here and people weren’t familiar with it.”
Dubai had become accustomed to a near-decade of unprecedented growth as it turned itself into a tourism, trade and financial services hub. Government-owned firms built the world’s tallest building and man-made archipelagos in the shape of the continents. They also snapped up trophy assets from London to Las Vegas, in the process accumulating $109.3bn of debt, according to International Monetary Fund (IMF) estimates.
When the global financial crisis hit, however, the positive headlines turned negative and Dubai was shattered by the flight of foreign investment from the Gulf. The emirate’s real estate market crashed, and Dubai World’s exposure “added petrol to the fire”, says Charlesworth.
“We were in the middle of great turmoil and it was a big surprise, which is evident if you look at the prices of assets – the market value of assets literally crashed,” recalls Amer Halawi, Head of Research at Dubai-based investment house Shuaa Capital.
Global media coverage was ferocious, and as Western banks scrambled to assess their exposure to Dubai World, officials in the emirate went as far as blocking distribution of the Sunday Times, a UK paper which printed a two-page spread on Dubai’s debt crisis alongside a picture that was deemed offensive.
“The media coverage certainly had an impact on the investment market, and it leaves a legacy in people’s minds, particularly those outside this market, who wonder what is going on here,” says Charlesworth at JLL.
“People who don’t understand this market – the dynamics of the market and what drives it historically – now have a big question mark in the back of their minds. It takes time to unravel that and get them back on track and thinking properly, as negative sentiment tends to overshadow the good in a market.”
There has at least been tangible progress in the restructuring process. On May 20 2010 Dubai Government said it had reached a deal with its main creditor group, under which banks would be paid $4.4bn in five years and another $10bn over eight years at below-market interest rates.
The settlement came after Dubai Government hired Aidan Birkett, managing director of Deloitte’s corporate finance team, to oversee Dubai World’s debt restructuring. The government also established a Supreme Committee, which will appoint a management team “to lead the company through its next phase of development and to implement the new business plan”, after Birkett’s departure.
“2010 began badly but a lot has happened since and we’ve had very good news in the past few weeks,” says Helawi at Shuaa.
“The market has been relieved by the recent announcements, as expected. The government has succeeded in bringing some sort of improvement to the mindset and the confidence, as reflected by the fact that prices have been going up.”
The last outstanding creditor – US distressed debt fund Aurelius Capital Management – sold its position to Deutsche Bank, one of Dubai World’s main creditors, on October 27. However, according to a JP Morgan report the company’s creditor banks may have lost as much as 56% of the value of the loans they made to Dubai World, and lenders may have to set aside 10% of these loans to cover losses.
“The government has put a lot of visible effort into restructuring debt and reassuring investors,” says Helawi. “Whether it is enough or not, remains to be seen – the government has been proactive, but there’s clearly more to be done.
“Dubai’s debt restructuring is not the only issue the emirate faces, but it has contributed to bringing down the value of stock market assets, relative to other regional stock markets,” he continues.
“The gap in valuation can be explained in part by the debt situation and the near-default that has been anticipated and that people have been talking about. But there are other issues too.”
These other areas of concern include oversupply in Dubai’s once-booming property market, as well as a host of legislative issues which were left unaddressed for most of the last decade, but are now limiting international investor confidence in the real estate sector.
“Dubai was focused on infrastructure, and perhaps more on launching projects than actually getting them built,” suggests Charlesworth. “In hindsight you can say that it might have been better to get the legal structure in place first, but that can take years and years. Do you spend all that time getting the regulations right, or do you just get on with it?
“The government is working hard but you can’t do it all overnight, and we’re always in danger of comparing ourselves to mature markets that have been doing these things for hundreds of years.”
At Shuaa, Helawi believes that international investors are returning cautiously to the emirate. “The appetite for Dubai among the international institutional community has fluctuated, but in the recent past it has increased significantly, and that’s very exciting,” he insists.
“There are issues to fix, and real estate is clearly one of them, there’s clearly overcapacity and the regulatory framework is not comforting enough for international or local investors,” he continues.
“But the appetite for Dubai is re-emerging and prices have rallied – it’s clear on the equities front, on the fixed income front, and on the credit front.”
The emirate’s public and privately-owned businesses will be hoping that appetite continues to build; with some $30bn worth of state-linked debt maturing in 2011 and 2012, the next twelve months could be as challenging as the last.
Sunday, November 7- 2010 @ 17:11 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.