Since the last week of November 2009, and after Dubai's surprise, but badly handled announcement about Dubai World, it almost became a fashion to indulge in some Dubai Bashing. So much so that the rating agencies, for whom I have scant respect, jumped in and turned the Dubai bashing sentiment into an all out assault on the UAE. Pundits who just a year ago were queuing up for invites to the latest launch of a real estate project were suddenly become experts on who felt they have to join in the assault. I am not suggesting a conspiracy theory in the media, but simply pointing out that it seems its fashionable to run down UAE and Dubai because that is what sells newspapers. I fully admit that there are problems and yes there is a need for transparency and accountability of the situation and a great deal needs to be done to bring back confidence to the system.
However, it is deeply irritating that when the good news has come out, the bond that was the subject of such concern has been paid, and most importantly Abu Dhabi and Dubai have shown that there is a supremacy of the Federal system, resulting in the $10 billion assistance from Abu Dhabi to Dubai, all this good news is not being presented in the right light. A senior correspondent of a class A European newspaper asked me, in a rather sinister way, as to what was the price Dubai will pay for this assistance. Even though whether the assistance is a loan, or indeed an asset purchase, frankly who cares? The bottom line is a crisis has been averted, and some measure of confidence has come back to the market place.
Rating agencies have found more reasons than one to continue to make it sound like a contagion. I wonder what did they know that was new now compared to a year ago? Did they not know of the debts of Dubai World? Had they not in their review process and due dilegence with banks, when granting the ratings, discussed these issues? So they say the standstill suddenly brought home the vulnerability of the situation; it highlights how weak their research was in the first place.
It is time to look ahead now. I know that the financial system has been tested in this crisis, and more importantly the country's political will as one nation has been tested and this came through with flying colors. I have been resident here for close to 30 years, and have often spoken out about matters that have needed improvement. I have not been candid and blunt because `I am not some journalist who might want sensationalism to promote my name, but someone who really believes that in the past 38 years UAE has grown to be a fabulous place to live and work. Its a safe place, with a great infrastructure and people who have been more welcoming then others. Yes there are tons of issues that need to be resolved and this is where the focus must shift.
I was asked what was the lesson learned from this crisis.
I would say if there is one thing that is not need is a system of governance, at the Federal level, whereby debts of each of the emirates and their GRI's can be monitored. I was taken aback that Dubai World, on its own was allowed to pile on such a colossal debt, much larger than Dubai's own debt. I believe that this situation should never be allowed to happen again. I am not concerned with the politics of the situation, it is in a sense, a risk even a rich nation like UAE cannot afford to take. Indeed this crisis will pass, and I say this with knowledge and confidence that there will be support from all quarters within the country to resolve the problems of Dubai World, and there will be a clear process to ensure it never happens again.
Lenders must also be made to realize that they have to carry part of the pain in this. I asked a well known journalist who has been writing about this matter every day as to why hasn't the carelessness of the bankers been questioned in this lending? I never saw one hard hitting piece on this subject, it was almost as if only the borrower was being blamed for the excesses. I believe that while the new arrangements for Dubai World have, in the longer term created the means for the repayment of the debts to take place, there is a need for bankers and bond holders to also agree to a restructured debt. This is the pain of lending and it is time that all parties understand this comes with the territory.
Wednesday, December 16, 2009
Sunday, December 13, 2009
The Wolves need to back off.
When the crisis of credibility and debt was unfolding in Dubai and the region, I had commented that this crisis has one benefit that it will make the UAE think like a nation and not as individual city states. Irrespective of the rumors of assets deals between Dubai and Abu Dhabi, the bottom line was, in my eyes, that an adherence to a one Nation concept was all the more important to all parties. Since September of this year this has been the message of one people and one nation. It was in this light that the announcement today of Abu Dhabi's $10 billion support for Dubai has been made. Yes it leaves one wondering why all this drama if the end the Sukuk maturing today was going to be paid in the first place. I have all along said the public relations side of this episode leaves a great to be desired and I am sure all parties have learned from it.
I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.
For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.
While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.
I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.
For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.
While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.
Friday, December 11, 2009
The Night of the Rating Agencies
The rating agencies have in rapid succession changed their position of Dubai and UAE entities, almost like in famous night of the generals from World War II, where former darlings fell from grace.. Suddenly the very story they were selling so well a year ago is being shot down by them in their supposed zest for 'caution'. In what clearly seems a case of jittery nerves Moody's has down graded three UAE based banks citing the over all financial situation over the Dubai World debt to be the reason for caution. Interestingly they say this when on November 29th, 2009, yes just about 10 days back, they said that UAE Banks rating were on review and then do not explain the reasons for the downgrade other than some prosaic general statements. I know a Moody's spokesperson will say yes the result of this review is the downgrade yesterday of EmiratesNBD, Dubai Islamic Bank and Mashraq Bank.
To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see http://zerohedge.blogspot.com/2009/07/calpers-lawsuit-against-rating-agencies.html where transcripts of the actually filed complaint appear.
Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.
Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.
Here is how is see why the panic is not being seen in balance.
1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.
I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.
I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?
To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see http://zerohedge.blogspot.com/2009/07/calpers-lawsuit-against-rating-agencies.html where transcripts of the actually filed complaint appear.
Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.
Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.
Here is how is see why the panic is not being seen in balance.
1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.
I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.
I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?
Wednesday, December 9, 2009
Moody's Cheap Shot.
During my banking days I often met with rating agencies and always found them to be a rather pompous lot who 'researched' alot and often were judgmental to the point of sounding like pontificating pundits. They performed an important task for the financial markets and while generally did a decent job, but once in a while they messed up in royal style. Moody's downgrade of Dubai Electricity and Water Authority (DEWA) is based on Dubai government's "recent decision to explicitly segregate its direct obligations from those of its GRIs, following which a decision was subsequently made to pursue a debt restructuring for Dubai World'.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.
Tuesday, December 8, 2009
dubai and the press
Currently the financial press is littered with stories about Dubai and its current woes. In the plethora of articles from Hong Kong, to India, and the West, soothsayers are predicting the end of Dubai's glory days. Indeed the botched public relations attempt by Dubai was not only lacking elegance but also spat into the face of the financial community almost demanding a 'standstill'. Yet we live in a sad world where in moments such as these analysis that is objective are drowned in the moment of sensationalism. I am not suggesting that the urgent $26 billion debt restructuring of Dubai's world is a mirage, but I do feel that understanding defaults and quasi government debt is a little more complex then just being hyped up about it all.
But lets see the context. It is not as if Dubai is the only economy that is having to respell the word debt in one hundred different ways. Companies, public sector enterprises and indeed governments all restructure debt, sometimes by issuing new debt at other times by negotiating new terms on existing debt. So why be so surprised that Dubai has asked for some concessions and understanding? Yes admittedly it has done it with a blend of arrogance and naivety but lets move on from that and concentrate on the issues at hand. Are debt holders of Dubai World so sure that enforcement of claims will give them a better reward then cajoling the shareholder of Dubai World, which is the government itself, to put some meaning into the word 'support'.
There will be some pain through this process, and indeed for debt holders they too should know that the document they signed for the debt nowhere uses the name of the Dubai government as a guarantor, so now suggesting that there were implied guarantees is wishful thinking. It is another matter that Dubai World can ill afford to 'default' on the debt as the repercussions for Dubai and the UAE, if not the region, will be enormous. Analogies with meltdowns in the past, and references to the 'last days of Rome' are all sensationalist penmanship, and do nothing to provide merit to the discussion in hand. I have always argued that Dubai needs to create some medium term debt to replace the short term nature of its borrowings and this mismatch needs to be adjusted at the earliest.
As Dubai will tone down its 'Las Vegas on Viagra' sentiment and scale back some of its ambitious plans, there will also need to be understanding within the financial community that strangling the chicken does not always mean every one will get a meal as the wolves that tear the chicken sometimes leave nothing for anyone including themselves. The state of the financial press is such that is not even willing to see the broader picture. Dubai is a part of the UAE, and beyond the Federal Reserves held by the Central Bank, there is a huge cache of funds with Abu Dhabi entities who, as I calculate need only to give 100 days if their revenue to pay off all of Dubai's debt! Yes it is not forthcoming like a spigot turned on, because quite frankly it would be too rewarding for bankers who now claim they didn't know what and who they were lending too. If push came to shove, irrespective of the supposed political intrigue, UAE can and will act as one nation.
Some articles have claimed that there is not hope as the total public sector debt of Dubai is equivalent to its GDP. I conceded this was the case as of today indeed, but then the total debt of the US government is 90.4% of its current GDP! Why is this financial press so paranoid about the failure of the US system? In the 30 years I have been here not one bank has ever gone insolvent, and i mean a bank incorporated within the UAE. Yes I have long argued that some projects planned and being executed within Dubai would never really have a decent return on investment and some projects were about ten years before their time. But we must not forget that ten years back when a six lane highway being built between Abu Dhabi and Dubai many thought it was way over the needs of the time. Even today in this recession we see its not really an empty highway.
My point is simple, yes Dubai may not have held up to its much celebrated PR machine status, but then while these problems may well be real, there is a need for balance. Dubai government must bring to the forefront its own faces, not those of expatriates and hired guns to deal with the issues. It must also sincerely and truthfully explain what went wrong and seek substantive discussions about the way forward. The press for its part should remember that sensational stories have an expiry date which is usually one day. Look ahead, educate, explain and suggest the way forward.
But lets see the context. It is not as if Dubai is the only economy that is having to respell the word debt in one hundred different ways. Companies, public sector enterprises and indeed governments all restructure debt, sometimes by issuing new debt at other times by negotiating new terms on existing debt. So why be so surprised that Dubai has asked for some concessions and understanding? Yes admittedly it has done it with a blend of arrogance and naivety but lets move on from that and concentrate on the issues at hand. Are debt holders of Dubai World so sure that enforcement of claims will give them a better reward then cajoling the shareholder of Dubai World, which is the government itself, to put some meaning into the word 'support'.
There will be some pain through this process, and indeed for debt holders they too should know that the document they signed for the debt nowhere uses the name of the Dubai government as a guarantor, so now suggesting that there were implied guarantees is wishful thinking. It is another matter that Dubai World can ill afford to 'default' on the debt as the repercussions for Dubai and the UAE, if not the region, will be enormous. Analogies with meltdowns in the past, and references to the 'last days of Rome' are all sensationalist penmanship, and do nothing to provide merit to the discussion in hand. I have always argued that Dubai needs to create some medium term debt to replace the short term nature of its borrowings and this mismatch needs to be adjusted at the earliest.
As Dubai will tone down its 'Las Vegas on Viagra' sentiment and scale back some of its ambitious plans, there will also need to be understanding within the financial community that strangling the chicken does not always mean every one will get a meal as the wolves that tear the chicken sometimes leave nothing for anyone including themselves. The state of the financial press is such that is not even willing to see the broader picture. Dubai is a part of the UAE, and beyond the Federal Reserves held by the Central Bank, there is a huge cache of funds with Abu Dhabi entities who, as I calculate need only to give 100 days if their revenue to pay off all of Dubai's debt! Yes it is not forthcoming like a spigot turned on, because quite frankly it would be too rewarding for bankers who now claim they didn't know what and who they were lending too. If push came to shove, irrespective of the supposed political intrigue, UAE can and will act as one nation.
Some articles have claimed that there is not hope as the total public sector debt of Dubai is equivalent to its GDP. I conceded this was the case as of today indeed, but then the total debt of the US government is 90.4% of its current GDP! Why is this financial press so paranoid about the failure of the US system? In the 30 years I have been here not one bank has ever gone insolvent, and i mean a bank incorporated within the UAE. Yes I have long argued that some projects planned and being executed within Dubai would never really have a decent return on investment and some projects were about ten years before their time. But we must not forget that ten years back when a six lane highway being built between Abu Dhabi and Dubai many thought it was way over the needs of the time. Even today in this recession we see its not really an empty highway.
My point is simple, yes Dubai may not have held up to its much celebrated PR machine status, but then while these problems may well be real, there is a need for balance. Dubai government must bring to the forefront its own faces, not those of expatriates and hired guns to deal with the issues. It must also sincerely and truthfully explain what went wrong and seek substantive discussions about the way forward. The press for its part should remember that sensational stories have an expiry date which is usually one day. Look ahead, educate, explain and suggest the way forward.
Saturday, December 5, 2009
Can Dubai survive the Debt crunch?
Dubai's dream of progress and prosperity may well have been dented but its not a failed dream. In the context of the world economic crisis the crisis that Dubai faces is not as monumental as is being suggested. Dubai Worlds obligations are listed at $60 billion but these are obligations to contractors, suppliers, and indeed bond holders and debt providers. A number of contractors and consultants have only recently indicated that they would be willing to take a haircut on their receivables, some suggesting as high as a 35% reduction in exchange for a payment plan. After all, the logic goes, that these contractors benefited with robust profits from the same clients in the good days and indeed are more accommodating as the times get rough.
Over the weekend Bond holders of the $4 billion Sukuk were adamant that given they have 25% of the Sukuk holders on their side they can negotiate tough to force a payment of the bonds. Failure to have this 25% might well mean that Sukuk will be restructured, and even if an enforcement is done there are complex legal issues concerning Sukuk's which, frankly, have not been tested in a court of law before. Interestingly, if Dubai government, as the shareholder of Dubai World, did want to pay this Sukuk off, then even it runs the risk of being accused of causing losses to Sukuk holders who sold the bonds after the initial announcement of the standstill, since the standstill announcement came from Dubai government and not Dubai World itself.
Paying this Sukuk is possible and if the restructuring or extension to May 2010 is agreed by more than 75% of the holders then the current issues will subside to some extent. If not then I do feel that the resources to pay this $4 billion bond will happen even though may leave many of us wondering why the whole drama happened in the first place. I suspect that when the Dubai Government announced the 'standstill' it was felt that the market would take this news positively as the government was stepping in. This clearly backfired and the market took the news they didn't like most and made a meal of it all. If I was a bond holder and a principal shareholder being the government was initiating a new plan for repayment I would rather go with it then to rely on the assets of this particular Sukuk (in this case Nakheel's land bank which is highly deflated at the moment). But lawyers and bankers do not always make the best decisions in such moments.
However, we have to look beyond to how Dubai can survive this debt crunch.
The issue that needs to be addressed for Dubai is essentially $26 billion of debt for Dubai World, which is like a fly in the ointment at the moment. In essence the Dubai story is not over simply because a recovery in the region will bring focus back to the essential element that everyone asks. Where would you like to be based to do business in the Middle East? The answer is always going to be Dubai because of the investment it has made in the infrastructure, connectivity with the world, its airports and ports and most of all the UAE as a whole is a pretty safe place to be in. Yes its property market is dented, some believe taking as much as three years to repair itself, but its position as a financial hub, a tourist stop over and a traditional role as a commercial hub are not effected in any severe sense.
The most important thing Dubai must do is initiate a seven to ten year bond program, some of it supported by the government itself, and thus plug the gap between short term obligations and long term cash flows. To do this their handling of the current Sukuk crisis is important and will set the stage for restoring the dented confidence. Yes support can come from the Federal Government, as it has recently, or the Abu Dhabi controlled entities (as the recent $5 billion placement shows) and once goodwill is restored the ability to restructure may not be all that hard.
Interestingly, my banker friends tell me, prior to the November 25th standstill announcement discussions with bankers on an over all approach were going very well. Infact some even felt that an over all restructuring of the debt was a foregone conclusion. Indeed a bad public relations gambit backfired it all and focus on a smaller piece of the debt became paramount. Now the task ahead is to get back to the same level of confidence that was there three weeks back and build from there.
In the realm of a three year period the over all position of Dubai will be considerably better, even though we only look at the GDP as an indicator we forget that a substantial part of their GRE holdings are overseas and these can, in a global turn around, be crown jewels can can be sold off for a sizable profit. I believe the return to the enabling economy model where commerce, tourism and services will become the rock bed of the recovery that is highly possible.
Over the weekend Bond holders of the $4 billion Sukuk were adamant that given they have 25% of the Sukuk holders on their side they can negotiate tough to force a payment of the bonds. Failure to have this 25% might well mean that Sukuk will be restructured, and even if an enforcement is done there are complex legal issues concerning Sukuk's which, frankly, have not been tested in a court of law before. Interestingly, if Dubai government, as the shareholder of Dubai World, did want to pay this Sukuk off, then even it runs the risk of being accused of causing losses to Sukuk holders who sold the bonds after the initial announcement of the standstill, since the standstill announcement came from Dubai government and not Dubai World itself.
Paying this Sukuk is possible and if the restructuring or extension to May 2010 is agreed by more than 75% of the holders then the current issues will subside to some extent. If not then I do feel that the resources to pay this $4 billion bond will happen even though may leave many of us wondering why the whole drama happened in the first place. I suspect that when the Dubai Government announced the 'standstill' it was felt that the market would take this news positively as the government was stepping in. This clearly backfired and the market took the news they didn't like most and made a meal of it all. If I was a bond holder and a principal shareholder being the government was initiating a new plan for repayment I would rather go with it then to rely on the assets of this particular Sukuk (in this case Nakheel's land bank which is highly deflated at the moment). But lawyers and bankers do not always make the best decisions in such moments.
However, we have to look beyond to how Dubai can survive this debt crunch.
The issue that needs to be addressed for Dubai is essentially $26 billion of debt for Dubai World, which is like a fly in the ointment at the moment. In essence the Dubai story is not over simply because a recovery in the region will bring focus back to the essential element that everyone asks. Where would you like to be based to do business in the Middle East? The answer is always going to be Dubai because of the investment it has made in the infrastructure, connectivity with the world, its airports and ports and most of all the UAE as a whole is a pretty safe place to be in. Yes its property market is dented, some believe taking as much as three years to repair itself, but its position as a financial hub, a tourist stop over and a traditional role as a commercial hub are not effected in any severe sense.
The most important thing Dubai must do is initiate a seven to ten year bond program, some of it supported by the government itself, and thus plug the gap between short term obligations and long term cash flows. To do this their handling of the current Sukuk crisis is important and will set the stage for restoring the dented confidence. Yes support can come from the Federal Government, as it has recently, or the Abu Dhabi controlled entities (as the recent $5 billion placement shows) and once goodwill is restored the ability to restructure may not be all that hard.
Interestingly, my banker friends tell me, prior to the November 25th standstill announcement discussions with bankers on an over all approach were going very well. Infact some even felt that an over all restructuring of the debt was a foregone conclusion. Indeed a bad public relations gambit backfired it all and focus on a smaller piece of the debt became paramount. Now the task ahead is to get back to the same level of confidence that was there three weeks back and build from there.
In the realm of a three year period the over all position of Dubai will be considerably better, even though we only look at the GDP as an indicator we forget that a substantial part of their GRE holdings are overseas and these can, in a global turn around, be crown jewels can can be sold off for a sizable profit. I believe the return to the enabling economy model where commerce, tourism and services will become the rock bed of the recovery that is highly possible.
Tuesday, December 1, 2009
The Dubai World Debt: A perspective from Dubai.
In moments of crisis, especially financial ones, bankers tend to seek the shortest distance to the source they think can pay them off best, and ofcourse, with the least of hassle. While I have offered my perspective on the way the Dubai World matter was handled, or mishandled, I may have come across as rather 'soft' of the bond holders and the debt holders. While some may suggest that Dubai Worlds handling of this debt saga is more akin to the way someone might be handling their credit card debts but shuffling around payments to keep every card issuer happy, they have, till yesterday, actually failed more on public relations side of the story.
For bankers, on the other hand, they have found an unlikely ally in the media who have questioned why the Dubai Government or indeed Abu Dhabi do not step in. Both miss a crucial point. If support, financial or in the shape of explicit guarantees, comes from these sources then it should be the choice of Dubai government rather than something the media or the bankers cajole them into. Yes Dubai World could be seen as a public sector company of the Government of Dubai, but this merely makes it a stakeholder, and while generally governments do prop up such companies in times of stress, this propping up is not necessarily done through guarantees, but more through restructuring and financial support as a stakeholder rather than as guarantor. Indeed banks are seeking more the goodwill of the government, but rather than asking them to help out it is being implied that they must do so.
What Dubai Government is saying is really that the distinction has to be first made of the capacity in which this help is sought. In doing so it is distancing the call of the media for some sort of government led financial support in the form of a pay up, with actually saying that the government as a stakeholder is helping in the restructuring of the companies in question. This has to be, in my opinion, a first and important step to move forward with the solution of the problems for the long term. Only after these steps are exhausted then Dubai must make an independent judgment on how to deal with the systemic risk that an non-resolution of the problem effects Dubai's other companies and the economy.
Indeed while at one end of the spectrum some may argue that the credibility of Dubai has been hurt to the point where bankers may not be so forthcoming to new commitments, the fact remains it glosses over the inadequacies of the bankers own assessment of risks during the hey days. While Dubai cannot simply argue 'why did you lend so much to one company' it still does bring home the truth that bankers assumed that lending to some entities in Dubai as akin to lending to the government. Dubai government has not told the bankers you are on your own now, but have asked them, without being too clear, that Dubai World will restructure itself and to do this it will engage with all parties concerned to come up with a plan. I believe the statement of disclosure of the debt, and the problem segment of the debt, was a huge first step in the right direction. It is this that we have to focus upon rather than the sensational elements of this story.
It is sad, that unlike the US where there are 30 year treasury bonds issued by the government, there are no long term debt instruments available in the market to match long term funding needs with the demands of a long term development program. Eventually I believe that once the restructuring is considered and banks and bondholders have assessed the merits of the situation, Dubai should consider a longer term bond program. However, how they handle the Dubai World issues will be instrumental in the way forward for this strategy to work.
For bankers, on the other hand, they have found an unlikely ally in the media who have questioned why the Dubai Government or indeed Abu Dhabi do not step in. Both miss a crucial point. If support, financial or in the shape of explicit guarantees, comes from these sources then it should be the choice of Dubai government rather than something the media or the bankers cajole them into. Yes Dubai World could be seen as a public sector company of the Government of Dubai, but this merely makes it a stakeholder, and while generally governments do prop up such companies in times of stress, this propping up is not necessarily done through guarantees, but more through restructuring and financial support as a stakeholder rather than as guarantor. Indeed banks are seeking more the goodwill of the government, but rather than asking them to help out it is being implied that they must do so.
What Dubai Government is saying is really that the distinction has to be first made of the capacity in which this help is sought. In doing so it is distancing the call of the media for some sort of government led financial support in the form of a pay up, with actually saying that the government as a stakeholder is helping in the restructuring of the companies in question. This has to be, in my opinion, a first and important step to move forward with the solution of the problems for the long term. Only after these steps are exhausted then Dubai must make an independent judgment on how to deal with the systemic risk that an non-resolution of the problem effects Dubai's other companies and the economy.
Indeed while at one end of the spectrum some may argue that the credibility of Dubai has been hurt to the point where bankers may not be so forthcoming to new commitments, the fact remains it glosses over the inadequacies of the bankers own assessment of risks during the hey days. While Dubai cannot simply argue 'why did you lend so much to one company' it still does bring home the truth that bankers assumed that lending to some entities in Dubai as akin to lending to the government. Dubai government has not told the bankers you are on your own now, but have asked them, without being too clear, that Dubai World will restructure itself and to do this it will engage with all parties concerned to come up with a plan. I believe the statement of disclosure of the debt, and the problem segment of the debt, was a huge first step in the right direction. It is this that we have to focus upon rather than the sensational elements of this story.
It is sad, that unlike the US where there are 30 year treasury bonds issued by the government, there are no long term debt instruments available in the market to match long term funding needs with the demands of a long term development program. Eventually I believe that once the restructuring is considered and banks and bondholders have assessed the merits of the situation, Dubai should consider a longer term bond program. However, how they handle the Dubai World issues will be instrumental in the way forward for this strategy to work.
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