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Tactical support - Abu Dhabi rescues Dubai with $10bn

Monday, 14 December 2009 16:39

UAE - Dubai's government has announced it has been given a $10bn (£6.13bn) handout from United Arab Emirates neighbour Abu Dhabi to help it pay off its debts.

It will use $4.1bn (£2.5bn) of the money to bail out the government-owned investment company Dubai World.

The company's property development operation, Nakheel, needed the money to pay investors in an Islamic bond which was due to mature on Monday.

Fitch Ratings says today's direct support of Dubai by emirate Abu Dhabi, while constructive in avoiding a near-term default by a high-profile entity with state linkage, is nonetheless tactical in nature as opposed to a reversal of recent rhetoric regarding state support. While this move will help to avoid a default at the Dubai World subsidiary Nakheel, Fitch interprets the move as a tactical step to permit an orderly restructuring of obligations within Dubai to continue.

A USD10bn injection by the government of Abu Dhabi into the Dubai Financial Support Fund (DFSF), an existing mechanism which facilitates funding to state-owned entities, will be used to repay a Nakheel sukuk obligation which Dubai World had previously indicated would be restructured rather than repaid. The balance of the remainder will be utilised by the DFSF to "provide for interest expense and company working capital through April 30, 2010" specifically for Dubai World. In addition, the unspecified remainder of the funds will be used to support "obligations to existing trade creditors and contractors" of Dubai World within the Emirate of Dubai.

Additionally, and importantly in Fitch's view, the Government of Dubai has announced the introduction of a "comprehensive reorganisation law", which is expected to be based on the code currently employed by the Dubai International Finance Centre (DIFC). While questions remain on how this change will practically affect creditors, this action is clearly aimed at facilitating easier corporate restructuring. In turn, this has the obvious ancillary benefit of making it simpler for future corporate debt obligations to be addressed through court-based restructurings, rather than through a sovereign bail-out, reducing the pressure on Dubai to continue offering financial support to corporate entities, and on Abu Dhabi to accede to further financial pressures in the neighbouring emirate.

Fitch's ratings of state-owned Dubai entities Dubai Holdings Commercial operations Group (DHCOG - 'BB') and Dubai Electricity and Water Authority (DEWA - 'BBB-') were placed on Rating Watch Negative in response to the policy turmoil in late November 2009. Today's announcement does not provide sufficient clarity to resolve the watches, but Fitch expects that a near-term resolution of the watch status will determine either a level of state support consistent with the recent policy response, or the ratings reverting to a stand-alone level.

On 25 November, Dubai's government had said it would ask its creditors for a freeze on Dubai World's $26bn (£16bn) debt repayments.

In a statement earlier on Monday the chairman of Dubai's Supreme Fiscal Committee, Sheikh Ahmed bin Saaed al-Maktoum, said: "The government of Abu Dhabi has agreed to fund $10bn to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World."

He added: "We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices."

He also announced the implementation of new bankruptcy law.

"This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations," he said.

Global Arab Network

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Last Updated on Monday, 14 December 2009 17:00

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