Dubai World hits a pothole

Posted by johnhouk on Nov 28, 2009
 The little Emirate of Dubai has had colossal financial dreams of building a global financial empire utilizing the Muslim concept of Shariah Compliant Finance (SCF). Dubai has recently proclaimed the ultimatum of implementing a moratorium on its payment schedule for paying on interest debt which is HUGE.

The way I understand it (and financial understanding is not my forte) the Dubai Emirate (UAE) government is not the actual owner of DP World an Islamic financial corporation operating under SCF principles. Rather the Dubai Emirate has guaranteed all the finances of the Dubai conglomerate. With that said it is important to note that DP World was the corporation that the Bush Administration cleared to take over the port management of the major cities on the Eastern Seaboard. Fortunately a rare moment of bipartisan agreement stalled that DP World acquisition.

Gary H. Johnson, Jr. writes about the Dubai debacle to bring people like up to speed.

JRH 11/28/09
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Dubai World hits a pothole

By Gary H. Johnson, Jr.
11/27/09 04:06 PM EDT
Red County

From Shanghai to London to Wall Street, financial markets took a hard look at Islamic and emerging markets with the news that Dubai World pushed for a six-month moratorium on the interest of their debt and then checked out of its offices through Sunday for the beginning of the Hajj, fueling endless speculation and rampant selling from T-bills to Tech stocks. With just under 1000 firms from around the world doing business in and through the Dubai portals, uncertainty in the solvency of the state-owned conglomerate caused the futures markets of the world to hiccup and gasp.

Perhaps the most astonishing figure available from Western Media sources was the Christian Science Monitor, which noted that the "estimated debt" of the conglomerate Dubai World was between $60 billion and $90 billion. Quite a spread, indeed. The news of the DW interest punt caused Asian Markets to dip by 3 to 5 percent, the London Market banking sector to scramble and the DOW to tumble over 150 points, and what has traditionally been seen as Black Friday in America wound up in the red. Now Western financiers, on pins and needles, await an as of yet unknown response from the Arab Monetary Fund in Abu Dhabi.

According to Ron Scherer of CSM, "Dubai World has been an aggressive real estate developer, investing in everything from Troon golf courses and the Turnberry golf courses in Scotland. It has interests in the Chris Evert Tennis Centres and the Snowmass resort in Colorado. It also owns P&O Maritime Services, the major Australian-based company that does defense contract work, and Drydocks World, which provides shipping services in places like Singapore as well as the Persian Gulf."

After a 3 day sell off, which led to all time lows for RBS, Sarah Jones and Alex Xydias at Bloomberg noted that in Friday trading, the Royal Bank of Scotland Group Plc rebounded "5.2 percent after the lender signed an agreement to join the government’s Asset Protection Scheme." After borrowing $80 billion in a four year plan to facilitate a construction boom in Dubai to make it a financial hub, prices of homes in Dubai have fallen 50% from their highs of 2008, a reality which may have triggered the Department of Finance at Dubai World on November 25th to "ask all creditors for a 'standstill' agreement as it negotiates to extend maturities".

The troubles of Dubai World were telegraphed late last week when the Dubai International Finance Centre (DIFC) replaced Omar Bin Sulaiman with Ahmed Humaid Al Tayer as the DIFC Governor. The reason for Sulaiman's departure have not been aired; however, as the Chairman of both the Emirates NBD Bank and the Commercial bank of Dubai, it is likely that Al Tayer is rising to provide a fresh perspective on the next phase of the DIFC's growth into a regional trade hub. According to Arabianbusiness.com, the decision to shift leadership responsibilities to Communications Minister Al Tayer was to "improve performance in Dubai government and semi-governmental departments" in order to "boost the emirate's position as a global financial, trade and tourism centre".

Coming at the tail end of a months long shake-up of DIFC companies, Asa Fitch of the Emirate publication The National on November 20th reported that the major restructuring of Dubai World already "eliminated more than 12,000 jobs globally and consolidated some of its businesses to make them 'appropriately sized' to take on the challenges of the financial crisis. The restructuring was expected to save US$800 million."

Rocel Felix of the Khaleej Times reported that "Dubai World, saddled with $59 billion in debts, surprised markets on Wednesday by stating that it would ask its creditors to accept a delay in all repayments until the end of May, 2010. The government-owned group said it would seek a "standstill agreement" extending the maturities of debts owed by its member companies, including a $3.52 billion Islamic bond that its property subsidiary Nakheel PJSC is obliged to repay on December 14." Felix further noted that the DP World series of ports and the Jebil Ali Freezone (Jafza) would not be part of the restructuring, though Dubai World officials would not immediately clarify the nature or extense of the restructuring effort. While both Moody's & the S&P downgraded the credit rating of some Dubai government-run companies. "Moody’s downgraded DP World, Jafza, Dubai Electricity & Water Authority, DIFC Investments, Dubai Holding Commercial Operations Group and Emaar Properties. Moody’s doesn’t rate Dubai World or Nakheel."

According to Bruce Walton Stanley of the Khaleej Times, late Wednesday evening, the S&P "cut its debt rating for DIFC Investments LLC by four notches to BBB-minus, just one notch above junk grade. It lowered DP World Ltd. and Jebel Ali Free Zone by two notches to BBB-minus, and cut Dubai Holding Commercial Operations Group LLC by two notches to BBB-plus. Emaar Properties PJSC was downgraded by two notches to BBB-minus."

Sheik Ahmed bin Saeed al Maktoum, head of Dubai's finance committee, said in a statement Thursday that "our intervention in Dubai World was carefully planned and reflects its specific financial position," according to Zawya Dow Jones. More details are promised next week by Dubai authorities on the matter of the particular debt of Dubai World.

The shaken confidence in emerging markets has triggered one positive effect. While the DOW has hit a pothole and fallen into the red zone during the initial fallout of the DIFC restructuring bombshell announcement of a moratorium standstill and renegotiation of Dubai World debt, most reports fail to mention the fact that the US Dollar rebounded as investors flocked to the currency as a haven.

So...'Kay Bye.
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