Yesterday’s move prevented an embarrassing debt default by Nakheel, the property arm of Dubai World, and went some way towards reassuring investors.
Abu Dhabi’s intervention, which investors had been waiting for since the Dubai crisis began three weeks ago, was welcomed by credit ratings agencies as a step forward, but they said it would not alter the ratings of any Dubai state-owned companies.
Standard & Poor’s said it viewed the move as an “indication that Abu Dhabi stands ready to safeguard the stability of the UAE economy and financial system”.
Of the $10bn lifeline provided by oil-rich Abu Dhabi, $4.1bn was used to repay Nakheel’s Islamic bond, or “sukuk”, due yesterday. The rest will cover Dubai World’s interest payments and provide working capital until the end of April, assuming it can negotiate a standstill agreement with creditors on $26bn of its debt, almost half the $59bn it owes.
But doubts remain over whether Dubai World can restructure its debt, as well as the ability of other state-owned companies to repay their debts.
S&P and Fitch welcomed Dubai’s announcement of a “comprehensive reorganisation law” based on internationally accepted standards for transparency and creditor protection.
“This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations,” said Sheikh Ahmad Bin Saeed Al Maktoum, chairman of Dubai’s Supreme Fiscal Committee.
Fitch said the law would make 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.”
Deloitte’s task of restructuring Dubai’s debt headache was eased yesterday after oil rich emirate neighbour Abu Dhabi injected a much-needed $10bn.
Restructuring expert Aidan Birkett was sent in by the accountancy giant to clean up the mess from government-owned Dubai World’s repayment standstill on 25 November.
Deloitte’s team in Dubai have welcomed the move by Abu Dhabi and can now plough on full speed with the job at hand, said a source close to the situation.
“Aidan is still on board and the feeling within the team is that they can now get on with the restructuring.
“They now enter with much greater clarity, not as much chance of default and they can get on with renegotiation of debts, which can be long and difficult. It’s a very sensitive process,” the source said.
The cost of insuring Dubai’s sovereign debt also eased, leaving credit markets buoyant.
According to figures from CMA DataVision, five-year credit default swap spreads tightened by 1.45 per cent, to 3.96 per cent as the news of the bailout unfolded.
Insuring a hypothetical $10m would therefore cost $396,000 compared to $540,000 on Friday.
“Longer-term concerns over the investment environment in Dubai, and the broader region, will nevertheless remain,” said Timothy Ash, an emerging market analyst at Royal Bank of Scotland.
by Chris Kay