The story of Dubai World and its debt is turning into a soap opera that it really does not deserve to be. Some simple facts are being ignored from all sides, and suggests that we are all either naive or simply hoping that somehow the realities of a debt burdened company will simply change by 'talking' our way out of it. There are some essential media mistakes that indeed Dubai government officials have made and made it all the more difficult to handle then it really was.
The way I see it is that bond holders and lenders always knew that they are lending to a government owned entity without the explicit guarantee of the Government of Dubai. Whether their argument that being a shareholder of Dubai World they didn't need the guarantee to be explicit is really worthy of being tested in a court of law is still to be seen. As a former banker I am clear in that being the sole shareholder of the company doesn't mean you have guaranteed all the debts of the company, even though it may place moral responsibilities on you, strictly from a legal point of view such a guarantee is never explicit unless stated in the debt documents. This the bankers and the bond holders knew when they lent the money, even though they may argue their 'assumption' was that being a Government Related Entity (GRE) the risks of lending were less.
On the flip side of the coin, government officials who are stating that such lending to Dubai World is 'not guaranteed' may well be stating the legal position very accurately, however, they are missing a crucial part of how banks and lenders will see this statement. They will assume therefore that statements in the past three months of support for Dubai World and other GRE's were not meant in the spirit they were and with the current statement of disengaging the debt from being a government obligation, while legally correct, actually limits Dubai's ability to raise debt in the future.
This is where the much admired PR machine of Dubai has totally failed. In the first place what was the need for the 'standstill' statement on November 25th? They should have first had discussions with the bond holders and agreed a 'rollover' or 'extension' and then AFTER an agreement on the matter or otherwise made a statement. Secondly, when all the uproar is going on, why should a government official go on TV and state the obvious 'the government has not guaranteed the debts of Dubai World'. This is known to the bond holders, why say it again?
I am asked often about what I would do in this situation. Well first I am not fully aware of the all the financial matters within Dubai World so I am venturing a guess of a strategy that I believe will work, and perhaps will be excused not knowing the exact asset details that Dubai World. But in essence this is what I would do.
1. Dubai Government to state that yes it is the shareholder of Dubai World and given it is taking a more direct oversight of the current situation it is going to issue a White Paper on the status of Dubai World. It should then commission this study.
2. The Government along with Dubai World management should issue a statement of its total assets and assume they are, as some reports suggested in the past US$75 billion, then state how much of that is impaired with the current global financial situation.
3. Given that a major problem has been the mismatch of funding to the projects it should then offer a new program of debt which would be in chunks of three years, five years and seven years. The longer term debt could be supported by the Government of Dubai, or specific assets, or a combination of both. All short term debt holders then be convinced through a proper dialogue to participate in the longer term restructured debt, and where possible seek support from regional long term fund providers, be they from Abu Dhabi, or Federal Bodies, or even GCC banks.
4. Consider a selective program, stated now as an intent, to take some of the parts of Dubai World public through IPO's and in some cases with the recovery of the world economic situation, to even consider selling them off to repay debt.
5. Create a single platform for communication on the debt issue and related matters to avoid statements from all over the place.
While this all may sound simplistic, but I believe these steps will be better than what is the situation today. Lenders will be happier to have a true dialogue with the stakeholders rather than talking through the press on these matters. I do believe that as confidence is restored through these steps the over all picture will improve exponentially and restore much need confidence back to the system.