Dubai's debt woes have captured the world news attention, with articles written by people who are familiar with the region and the issues, and some obscure journalists who would be hard pressed to find Dubai on the world map. My three decades of experience living in UAE, and almost all of it in the financial sector, as a participant and observer, has taught me that in many cases the depth of the problems may well never be known, but in equal measure the efforts going into the solutions are always clouded in a measure of secrecy.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
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