Dubai's Debt Surprise

Almost thirty years back if someone had told me that a financial event in the Emirate of Dubai would shock world markets I would have smiled, sipped my tea and wondered what the person making such a statement was smoking. Three decades on, and with highways, a Metro, the tallest buildings in the world and an assortment of what were commonly called Dubai's crown jewels, Dubai had become, till the mid of last year, the choice economy to comment upon. Yet suddenly, with perhaps the worst timing possible, a terse announcement of a major Dubai conglomerate asking the banks for a 'standstill' on its debt, Dubai became the center piece of not only a financial crisis around the world but also the whipping horse for the financial press. The fact that the Dubai Debt Crisis has become a talking point is not a surprise, after all the US governments debt is also worrying at times through our civilizations financial history, however the way all this has been revealed has been more of a shock. The following reasons for this stand out.

1. Why publicly ask for a 'standstill', when the English financial dictionary has more subtle words like 'roll over', 'extension' and 'renegotiate' that are available to soften the impact of what is being asked for?
2. Why time the decision a day before the local markets will be closed for an extended holiday and the international markets going into Thanks Giving?
3. Why not explain the connection between a tacit Government announcement a month back that the debt would be met, and also the arrangement $5 billion of fresh debt the very day an old debt is being placed on 'standstill'?

Indeed the questions are many and the answers have been few. The fact that the episode, if I may call it that, has not been handled elegantly is an understatement. Yet analysts will be wondering where do we go to from this juncture? I believe a few explanations may shed light on this bizarre handling of events, given that a debt of almost similar size maturing on November 30, 2009 was successfully rolled over, why a debt maturing two weeks later has been so badly managed?

A. I believe that proper advice from seasoned bankers was not taken and had it been so then the possibility of a debt roll over was more easily possible than such a blunder. If the intention was to financially protect the assets of DP World then when the Sukuk was trading at around 65 it could have been a better time (about eight months back) to simply ask for a 'standstill' or a retirement of the debt and save over 55% of the $4.5 billion bond value (it was set to mature at 115). So I do not believe the intention was to 'default' but more likely to get some breathing room.

B. If the intent is to get breathing room then the fact that the committee managing Dubai's financial matters has been recently restructured (only a week back), they could have gone to the banks and bond holders and suggested that as the new committee gets a grip of things time is needed so a breather is requested and an extension is necessary.

C. It would well be that a distinction is being drawn between direct Dubai Government debt and the debt of Dubai owned corporations who do not have explicit Dubai Government debt insurance or guarantees. While this is a dangerous course to take in the current environment it does nevertheless stress that the point has been made and might well lead to the Government then 'stepping in' to retire the debt and in effect negotiate with the banks that a retirement should be followed by fresh debt against the full faith of the government itself. This is a tricky path given that the very faith that backed this lending has been dented by the way the 'standstill' was handled.

D. The fact that another US$ 5 billion is on tap from the second tranche of the US$10 billion bond offering (of which the first $5 billion was placed the same day of this dreadful announcement) indicates that there is a possibility that this will be tapped immediately to cover the DP World bond needs by December 14, 2009.

All these routes all may well put some badly needed band aid on the wounds to the reputation of Dubai, but for the long run it will be clear that Dubai will need better advice of how to handle already frayed nerves of bankers and bond holders. Will there be enough goodwill left on the table for all parties to carry the trust forward is a matter that will be tested in the coming weeks and months. While the debt seems large and perhaps unmanageable, the truth is that Dubai had the goodwill to have steered through these waters. Now bankers feel that goodwill was cast aside in large measure not by what was needed to be done, but how it was done.

Yet I would be optimistic for this being resolved simply because at some level parties within the UAE will stop seeing this as Dubai's embarrassment and realize its an embarrassment for the UAE as a whole. It is at this level that the matter can best be resolved and I suspect this will be the way this will be solved.