Dubai Defaults on its Debts.

[Big Orange]

Not surprising for a place like Dubai, a big city out in the middle of bugger all, but it bodes badly for the UK banks:

Dubai default fears rock markets
Global markets had their biggest collective fright since the chaos of the financial crisis as fears that Dubai could default on its debt gripped investors.

The FTSE 100 suffered its worst one-day fall since March closing down 3.2pc. Companies with big Middle Eastern shareholders led the rout, on the back of concerns that the high-rolling emirate would be forced to sell stakes to raise capital. Barclays Bank tumbled 7.9pc and the London Stock Exchange fell 7.4pc.

There were similar scenes across European stock markets with the French CAC-40 down 3.4pc and the German DAX index down 3.3pc. In America, markets were closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 2.2pc.

On Wednesday, Dubai World, the government investment company behind some of the emirate's most ambitious projects, said it was seeking to delay repayment on a tranche of its debt.

The company has $60bn (£35.9bn) of liabilities from its various companies including Nakheel, the property firm behind the Palm Jumeirah, the world's biggest artificial island, and the Nakheel Tower, the world's tallest building at 1km high. It also owns DP World, the ports operator that bought P&O Ferries. Nakheel is due to make a $3.52bn Islamic bond repayment, plus charges, on December 14. The company also unveiled a restructuring programme, to be headed by Aidan Birkett, Deloitte's managing partner for corporate finance.

Traders feared that the request for a six-month standstill was a sign that the Dubai Government was struggling with its other debts – and that the full impact of the financial crisis globally may not yet be over.

British bank stocks, that are among the most exposed in the world to the Middle East, were hard-hit. Royal Bank of Scotland slumped 7.75pc, Lloyds Banking Group lost 5.75pc and HSBC fell 4.4pc – all three are among nine banks who were bookrunners on an outstanding $5.5bn syndicated loan to Dubai World in June 2008.

HSBC's interim accounts showed that the bank had a $15.9bn exposure to the whole of the United Arab Emirates.

The concerns for UK banks also hit sterling, which fell to its weakest point in a month against the euro and a basket of currencies, while gilt futures leapt to a six-week high, propelled by renewed fears about credit quality.

Property shares fell sharply amid concerns of a fire sale of Dubai's UK assets, which include the Grand Buildings in London. Dubai has also been a major buyer of UK property.

Land Securities and British Land both shed over 3pc. Similarly construction companies were down including Balfour Beatty and WS Atkins, who are involved in key projects in the Middle East, including the Dubai Metro.

The confidence in emerging markets was hit. Analysts at Merrill Lynch said: "The risk of corporate default in Dubai clearly shows that contagion risks have not disappeared and that perhaps the market has turned a little complacent about risk.

Telegraph.co.uk

[Soontir C'boath]

Watching the tele for the past couple days, Dubai seemed to have bought a lot of commercial time but it appears they should've done this months ago.

[wautd]

Lets not hope this will cause yet another domino effect like we saw with the housemarket crisis in the US

[CaptainChewbacca]

Its things like this that make me count my lucky stars that I didn't take a job with a geotech firm working in Dubai last year. I'd be stuck and broke and screwed.

[Frank Hipper]

Years ago, watching them build fantasy islands and an extraordinary skyscraper city out of literally nothing with foreign labor on some television documenatary, I had a nagging thought about where the fuck that sort of money was coming from, and how intelligent those obscene levels of spending really were.

[J]

Lets not hope this will cause yet another domino effect like we saw with the housemarket crisis in the US

Hard to say, though early signs don't look good. Currency & commodities prices went pretty crazy yesterday and through the night and it's bled through to the Asian markets, Europe seems ok so far. The swings don't look big enough yet to cause a cascading system failure but all it takes is a big enough party on the wrong side of a margin call for everything to go kablooie. It's still a pretty delicate situation, we'll have a better idea of where things stand after the weekend.

[Mr Bean]

@J
Were we not talking just a week ago about how bailed our American banks are still doing pure bets w/credit default swaps on the Foreign currency exchanges?

[J]

Were we not talking just a week ago about how bailed our American banks are still doing pure bets w/credit default swaps on the Foreign currency exchanges?

I'm not sure if it was me, but yeah, the US banks are indeed doing lots of currency speculation with your taxpayer dollars. The most perverse part is they're actually shorting the US dollar with Uncle Sam's bailout money along with using it to do a USD carry trade.

[Havok]

Years ago, watching them build fantasy islands and an extraordinary skyscraper city out of literally nothing with foreign labor on some television documenatary, I had a nagging thought about where the fuck that sort of money was coming from, and how intelligent those obscene levels of spending really were.

We had a thread about all the crazy construction going on in Dubai a while back. I speculated, along with a few others, that while the spending was indeed fucking nuts, it served a purpose: What the fuck does Dubai do when it no longer has it's oil? TOURISM!
How feasible that actually is is definitely debatable, but hey, it's better than the country disappearing back into the sand.

[Darth Wong]

We had a thread about all the crazy construction going on in Dubai a while back. I speculated, along with a few others, that while the spending was indeed fucking nuts, it served a purpose: What the fuck does Dubai do when it no longer has it's oil? TOURISM!

How feasible that actually is is definitely debatable, but hey, it's better than the country disappearing back into the sand.

The purpose may make sense, but the sheer scope of it never did. When you put yourself that deeply into debt, you are creating a situation where you need extraordinary revenue just to make your interest payments. It's like opening a restaurant with a business plan that requires 50,000 people to walk through your doors every day, starting from the first day.

[The Kernel]

I just returned back from a business trip to Dubai recently and I have to say that nothing I'd heard about the place prepared me for what I saw. This was a place that bled ultra-oppulance from the glut of skyscrapers coming out of the desert to the artificial islands to the "7 star" hotel with courtesy Rolls Royces to the indoor ski course (pretty cool btw, if you ever go to Dubai I recommend it for the sheer novelty value). It actually had a similar feel to Vegas but with a more business edge to it, however it also lacked Vegas' sheer mobs of tourists as well.

Yet at the same time I was asking questions to myself like: "Who the hell is paying for all this? Surely there isn't enough tourism or business alone to just THIS?". Turns out I was right.

[K. A. Pital]

When I read the news of abandoned buildings and mass flight of foreign workers from Dubai here on SDN around December last year, I knew this shit was coming. Turns out some trends can't be "unpredictable".

Fun how all the morons now are claiming that "we never saw this coming in Dubai of all places". Really? The place which has shit industry, only finance and tourism - the two hardest-hit sectors?

[Fingolfin_Noldor]

Quite a few so-called "healthy" banks have billions of debt with Dubai now. This won't look pretty if Dubai defaults on everything.

[Norseman]

Quite a few so-called "healthy" banks have billions of debt with Dubai now. This won't look pretty if Dubai defaults on everything.

I seriously doubt that Dubai will default, most likely those banks will agree to renegotiate the loans. After all no one wins if Dubai goes bankrupt.

[Fingolfin_Noldor]

Quite a few so-called "healthy" banks have billions of debt with Dubai now. This won't look pretty if Dubai defaults on everything.

I seriously doubt that Dubai will default, most likely those banks will agree to renegotiate the loans. After all no one wins if Dubai goes bankrupt.

Probably. At the least some of the banks will likely take a hit in the credit rating.

[J]

Quite a few so-called "healthy" banks have billions of debt with Dubai now. This won't look pretty if Dubai defaults on everything.

I seriously doubt that Dubai will default, most likely those banks will agree to renegotiate the loans. After all no one wins if Dubai goes bankrupt.

On the other hand, Arab sovereign wealth funds have taken a severe beating since the start of the current depression recession, the UAE among others had huge investments in Citigroup and other similar assets which were absolute pummeled in the last year or so. A lot of the SWF assets were in real estate & commercial assets, both of which have taken heavy losses. As a result of the above they may be rather reluctant to do a bailout or renegotiate the loans held by foreign banks. They'll likely work out a deal with their own banks and then put a firewall around that and let everyone else suck sand, afterall, what's a foreign bank going to do, foreclose on a half-built luxury condo tower in the middle of the desert? Fat load of good that'll do them.

If I were a ruthless Arab banker, I'd be using this as an opportunity to stick it to the foreign banks. Or they might get stupid and dip into their SWFs for a bailout.

[The Kernel]

It almost doesn't matter whether they default or not--Dubai World is still going to get its credit rating slashed something fierce which means no cheap credit to fuel crazed development. Dubai isn't going to disappear because of this, but the era of non-stop building is probably over for now.

[wautd]

Years ago, watching them build fantasy islands and an extraordinary skyscraper city out of literally nothing with foreign labor on some television documenatary, I had a nagging thought about where the fuck that sort of money was coming from, and how intelligent those obscene levels of spending really were.

Building those things are one thing, but I expect maintenance costs like those articifial islands are obscene as well. I'd be suprised if they break even on that alone.

[J]

Looks like a cramdown's comin'

Bloomberg link

Dubai World’s Debt Not Guaranteed by Government (Update1)

By Zahraa Alkhalisi and Ayesha Daya

Nov. 30 (Bloomberg) -- Dubai’s government said it hasn’t guaranteed the debt of Dubai World, the state-controlled holding company struggling with $59 billion in liabilities, and that creditors must help it restructure.

“The company received financing based on its project schedule, not a government guarantee,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt. “Lenders should bear part of the responsibility.”

Dubai’s government said Nov. 25 that Dubai World would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30, 2010. The announcement led to the biggest declines in Asian shares in three months last week and Europe’s worst rout since April. Investors were concerned the proposal risks triggering the biggest sovereign default since Argentina in 2001.

Dubai shares tumbled and Abu Dhabi’s stock index today fell the most in at least eight years on the first trading day since the announcement.

Nakheel PJSC, Dubai World’s property unit whose $3.52 billion Islamic bond is due Dec. 14, asked the Nasdaq Dubai stock market today to suspend its securities “until it is in a position to fully inform the market.”

Government Prospectus

“The times of implicit support are clearly over,” said Philipp Lotter, vice-president of Moody’s Investors Service in Dubai. “In the past entities such as Dubai World certainly represented themselves as quasi-government entities, whereas there was no legal obligation on behalf of the government to support, and that has certainly shifted with last week’s announcement.”

In the prospectus for its first Islamic bond sale in October, the government said “certain strategic government- related entities of the emirate have significant borrowings which are not direct obligations of the government of Dubai.” The government raised $1.93 billion from local and international investors in the sale.

“If any of these entities are unable to, or are potentially unable to, fulfill their debt obligations, the Dubai government, although not legally obliged to do so and without any obligation whatsoever, may at its sole discretion decide to extend such support as it may deem suitable,” according to the prospectus.

Lenders “have deemed Dubai World as part of the government and that is not true,” al-Saleh said.

To contact the reporter on this story: Vivian Salama in Dubai vsalama@bloomberg.net
Last Updated: November 30, 2009 07:28 EST

In short, investors assumed Dubai World had a government guarantee much like Freddie Mac and Fannie Mae in the US. Dubai's government says this is clearly not the case, any support which the government chooses to give Dubai World is at its sole discretion, and there is no obligation at all, legal or otherwise, for the government to do so. The lenders will eat the losses on their bad loans and take a further hit on any debt restructuring. This is as it should be.

[Marcus Aurelius]

We had a thread about all the crazy construction going on in Dubai a while back. I speculated, along with a few others, that while the spending was indeed fucking nuts, it served a purpose: What the fuck does Dubai do when it no longer has it's oil? TOURISM!
How feasible that actually is is definitely debatable, but hey, it's better than the country disappearing back into the sand.

Dubai actually does not have much oil at all. Most of the oil is in Abu Dhabi, which is part of the UAE like Dubai, but does not have any legal obligation to help Dubai. UAE is a fairly loose federation and some would probably classify it as a confederation. However, as it turns out, the Dubai World did not have a government guarantee, so I guess Dubai is off the hook.

[Sea Skimmer]

Dubai make its start in the world by having the very few things close to a natural port on the Persian Gulf, which they expanded several times, and then by building the only shipyard and dry dock complex in the region which is capable of repairing supertankers and major warships. While they obviously went insane in the last decade, overall Dubai has had way better economic planning then the other Arab gulf states which have only very recently begun any serious effort to diversify.

[Big Orange]

I can see why Dubai had very serious harbour facilities and the US Navy attempting to useDubai as a repair bay caused an uproar.

The cratering of Dubai World as a company and Dubai in general is deep, slow, and horrible:

Confidence will never return in Dubai

The crisis in Dubai has gone beyond debt and become one surrounding the credibility of its leadership. Dubai World’s failure to honour its obligations has shaken faith among the international investment community in Sheikh Mohammed bin Rashid Al Maktoum, the Emirate’s normally ebullient leader.

The price of restoring it is likely to be much more than just more prudent borrowing and greater transparency. It is likely to be a demand for a restructuring at the top: this means a much clearer distinction between the Royal Family, the Dubai Government and the businesses of the glittering Emirate.

“It has absolutely destroyed confidence. Who will do business with Dubai now?” said Christopher Davidson, an expert on Gulf economics at the University of Durham. “Sheikh Mohammed was hinting for years about a full sovereign guarantee behind these developers.

“The international financial community, and I know this to be the case in London, won’t do business with Dubai again,” he said. It’s a really devastating scenario.”

Sheikh Mohammed has blamed the negative coverage of Dubai’s recent woes on the media and unnamed conspirators determined to see an Arab success story fail. That may play well with the Emirati audience but it is less persuasive to professional investors who feel they were misled. The timing of the Dubai World announcement, on the eve of a series of public holidays, created particular opprobrium. Government officials have turned off their phones.

Experienced analysts no longer trust the Government’s statistics, claiming they do not fully reflect the amount Dubai owes its foreign creditors. EFG Hermes, a regional investment bank, thinks Dubai could owe as much as $150 billion (£91 billion), twice the size of the economy and two and half times its officially declared debt. Dubai World alone owes British banks $5 billion. The extent of Sheikh Mohammed’s personal holdings in the big state-owned companies is often unclear. “We are probably talking many many years before we see a resolution,” said Fahd Iqbal, Gulf strategist at EFG.

Sheikh Mohammed, 60, who took over in 2006, has presided over Dubai’s final growth spurt. His image appears in every marble hotel lobby and public building. He is, in effect, a benign dictator, a man not to be crossed but who wants to be liked.

His grand vision for Dubai, however, is over. Even if its richer neighbour Abu Dhabi helps it out again financially, it will not be with the blank cheque Sheikh Mohammed had hoped for. He may have surrounded himself with “yes men” who sugar-coated worsening news, but Sheikh Mohammed cast himself as Dubai’s chief executive and if this were a company he would be on his way.

Such an outcome may not displease Abu Dhabi nor the United States. Dubai and Iran are trading partners, and arms shipments have been intercepted sailing from Dubai’s ports bound for the Islamic Republic.

Sheikh Mohammed’s anointed successor is Crown Prince Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, 27, but he recently made a gaffe by telling the World Economic Forum that the economy was “humming again” just days before the Dubai World crisis. Sheikh Mohammed’s older brother and official deputy, Sheikh Hamdan bin Rashid Al Maktoum, is largely unassociated with the boom and a more experienced possibility.

Times Online

On the subject of Sheikh Mohammed as a ruler: he had a bad habit of not taking serious advice very seriously. Any engineer and businessman who showed misgivings about a super project was supposedly asked to pack up and leave.

[The Kernel]

Such is the failure of all "benevolent dictators"...hell it's practically inevitable that massive nepotism and surrounding yourself with yes men will result from such a leader.

An experienced leader would know that if you wanted to salvage the sitaution, the best thing to do was to be totally transparent about the problem, admit mistakes, clean house and move on. This wouldn't have led to an immediate turnaround but it would have been a start and it would have assured the international financial community that Dubai was serious about cleaning up its act. Instead all the Dubai leadership has done was prove to the world that they are the equivalent of a 10 year old who has stolen Daddy's credit card.