There has been recent talk, some of it unsubstantiated press rumors, that Dubai World, the debt laden Government Related Entity of Dubai, has been contemplating, on the advice of its consultants, to consider as much as a 40% haircut on the debt and repayment of the balance over seven years with no interest. Needless to say, banks had two reactions ignore the rumor, (hard to do in the present day) or just balk as the audacity of the whole idea. Haircuts and debt repayments only happen to work, if that is the word to use, when there is literally no hope for any possibility of the principal debt ever being repaid. If the rumor was an attempt to test the waters, then the consultants need a fair dose of understanding that you hold a dialogue with the banks and do not pretend to have a conversation through the rumor mill, this always backfires.
While I am not privy to the discussions or indeed the people who are making these decisions, so what I venture our is conjecture and my recommendations may well be off the mark; yet as a three decade resident in the financial world of UAE, and an ardent well wisher for the country I would imagine a solution oriented approach is what is needed. What are the options ahead for this debt settlement?
In the first place we must be clear that the entire extent and complexity of the Dubai World debt is not entirely public and in similar vein neither is the possible cash flow profile over the next few years really known to the general public. Thus, if a seven or five year repayment is suggested it goes without saying that the cash flow projections will have to match this settlement profile. Keeping this in mind I would suggest the following.
1. When considering a haircut of any amount there has to be a clear understanding that this is seriously hurt the image and the standing of not only Dubai but also UAE within the financial community. Even if such an offer is accepted it will be with the gesture and lack of goodwill to provide additional funding in the future even when things are better. Bankers have a long memory and will remind you of their losses from decades back. Any haircut that is suggested has to be tied to an incentive. My suggestion would be to offer the banks a 70% settlement with the balance 30% to be strucurted as a Zero coupon bond with a long maturity and the caveat that this 30% would be exempted from payment under a formula for early payments. Thus if the 70% is to be paid say in seven years then for each year this amount is paid earlier there is a percentage of the 30% zero coupon bond that is written off. This creates an incentive for DW to pay early to get the discount. Ofcourse, the 70% should carry a new negotiated interest rate.
2. While legally there is the possibility of a bankruptcy to be considered and a financial 'guru' even said to me that there is no harm in such a route being explored and mentioned the examples of Enron, Japan Air Lines and many others. My simple response is that those were not GRE's and were joint stock companies with a broad public shareholding, DW's default will in the end be seen as a moral default of the entities behind it and this is not an option that should be even discussed.
Then the smart one's will ask are we not in a catch 22 situation?
In a sense yes, but then we have to consider long term solutions. Here is what I would do.
1. Within the UAE finance structure the Dubai Government should consider a long term Treasury Bond issuance program. These bonds should not only be seen as a monetary measure to deal with the deficit but also to restructure the debt of the GRE's in a manner similar to what many governments around the world do. US Treasuries are issued all the time and new issues retire old bonds and the cycle goes on under a long term program. It is precisely the lack of this program that has resulted in the funding of long term project needs with short term borrowing resulting in this mess.
2. The current Federal and Abu Dhabi Government assistance should also be rolled into this Treasury Bond program and perhaps even seek a tier one issuance with the Federal Government or Abu Dhabi government subscription of the earlier issues. This will bring much needed liquidity into the trading of these Treasury Bonds.
3. The UAE Central Bank to support such a program in the classification of these as investment securities rather than as simply loans to Dubai Government.
4. Set out the assessment of the cash flows of Dubai World and seek an debt retirement program which is realistic and not based upon the hope of things improving. It will mean that more detailed information on the cash flow and asset profile of the company and then to see how this can be managed to meet the obligations. With the backdrop of a Treasury Bond program the pressure to come up with three, five or seven year debt repayments will be overcome as the Treasury Bonds, through their liquidity and re-issuance programs will be able to manage a more orderly debt retirement rather than a pressured situation as we sit in today.
The reality is that any settlement of this debt has to be realistic in its scope and intent; failure to recognize the sensitivity of the situation within the financial world would have repercussions that might be hard to deal with. It is therefore vital that for the good the country's standing a positive approach is important in this situation. I am not convinced that haircuts and interest waivers is the solution, this is not giving the right message.
Showing posts with label dubai world. Show all posts
Showing posts with label dubai world. Show all posts
Monday, March 1, 2010
Sunday, January 17, 2010
Dubai World: Debt Trading
In mature financial markets debt trading is a normal activity and provides depth and liquidity to the market. It allows lenders to lighten their position, add on new better spread business and indeed creates a secondary market that is conducive to the financial system. Generally debt traded is securitized paper, i.e. bonds and notes, and there is niche market for syndicated debt obligations, or bilateral debts. It is this second market where the bulk of the trading is done on a bi-lateral basis and the scope and coverage of debt varies from sovereign debt, both of a good quality and troubled debt, to corporate debt. Some astute operators actually make a good amount of money in dealing with this debt.
The report, whether press speculation or not, that some of Dubai World's debt is being traded now comes with mixed feelings to me. In normal circumstances I would agree this is a healthy thing. At the worst it suggests that some of the debt holders are getting frustrated with the progress on the restructuring of the debt. However, as the report suggests, for the moment it is smaller players, i.e. smaller international banks, who are getting rid of their positions, and this is something I would have expected much earlier. Indeed, in the period between Nov 25, 2009 and December 14, 2009 (when the Sukuk was paid) there was allegedly a good amount of trading in the secondary market.
I had in a previous blog mentioned what I would do if I was handling the Dubai World crisis, (not that I would be asked), and I would just relate that to this piece of news now. What is needed most of all is that Dubai World puts into place measures for confidence building and these would include seeing that are the real issues that are holding up an agreement with the banks. I imagine banks wanting interest servicing and structuring of the new debt to be linked. The report that the debt is offered at 70% of face value is a bit troubling because it might suggest that the negotiations may be surrounded by talks of a 'hair cut' on the principle amount. If indeed the debt is traded out then this complicates matters and a new creditor has to enter into the negotiations, who may either negotiate harder or just be adroit in his position; and we all know it just takes one bad egg to spoil an omellette. I believe that at this stage there should be no talk of 'haircuts' on the principal debt it unnecessarily bargains a short term gain for a loss of reputation that cannot be afforded to be lost.
I also would think that this debt trading is perhaps a signal from some lenders to simply complicate matters by throwing in the towel, cutting their losses and letting a new set of players deal with this. All this would mean further delays.
On the other hand Dubai World had asked till April 2010 to agree new terms with the lenders, so in a sense there is time, and yet in the scheme of how the world is that is not a great deal of time. So for the moment my own guess is this debt trading is a signal for all parties to hunker down and come to a broad agreement as quick as is possible, which will then allow time for the documentation to fall into place. I am sure that in the end there will be a successful resolution to this matter and as much as it it needs time it also needs focus and clarity on the broader issues that one has to deal with.
I personally feel in the current situation the news that the debt is being offered for trading cannot be all that good. However, it might be just the news that is needed to get things moving forward.
The report, whether press speculation or not, that some of Dubai World's debt is being traded now comes with mixed feelings to me. In normal circumstances I would agree this is a healthy thing. At the worst it suggests that some of the debt holders are getting frustrated with the progress on the restructuring of the debt. However, as the report suggests, for the moment it is smaller players, i.e. smaller international banks, who are getting rid of their positions, and this is something I would have expected much earlier. Indeed, in the period between Nov 25, 2009 and December 14, 2009 (when the Sukuk was paid) there was allegedly a good amount of trading in the secondary market.
I had in a previous blog mentioned what I would do if I was handling the Dubai World crisis, (not that I would be asked), and I would just relate that to this piece of news now. What is needed most of all is that Dubai World puts into place measures for confidence building and these would include seeing that are the real issues that are holding up an agreement with the banks. I imagine banks wanting interest servicing and structuring of the new debt to be linked. The report that the debt is offered at 70% of face value is a bit troubling because it might suggest that the negotiations may be surrounded by talks of a 'hair cut' on the principle amount. If indeed the debt is traded out then this complicates matters and a new creditor has to enter into the negotiations, who may either negotiate harder or just be adroit in his position; and we all know it just takes one bad egg to spoil an omellette. I believe that at this stage there should be no talk of 'haircuts' on the principal debt it unnecessarily bargains a short term gain for a loss of reputation that cannot be afforded to be lost.
I also would think that this debt trading is perhaps a signal from some lenders to simply complicate matters by throwing in the towel, cutting their losses and letting a new set of players deal with this. All this would mean further delays.
On the other hand Dubai World had asked till April 2010 to agree new terms with the lenders, so in a sense there is time, and yet in the scheme of how the world is that is not a great deal of time. So for the moment my own guess is this debt trading is a signal for all parties to hunker down and come to a broad agreement as quick as is possible, which will then allow time for the documentation to fall into place. I am sure that in the end there will be a successful resolution to this matter and as much as it it needs time it also needs focus and clarity on the broader issues that one has to deal with.
I personally feel in the current situation the news that the debt is being offered for trading cannot be all that good. However, it might be just the news that is needed to get things moving forward.
Tuesday, January 12, 2010
Dubai World: Some free advice.
Not being an insider, or otherwise in the know of what is happening between the lenders and Dubai World I am in a sense handicapped as to how to approach the issue of offering some unsolicited advice. At the outset therefore this attempt may well be scuttled as 'un-needed' but being a well wisher of Dubai and the UAE and conscious of the delicacy of the matter I am venturing forth with some advice.
Some of the biggest names in the business world have fallen on hard times, this is part of the financial history we know, and any study of them and their successful come back is based on one truth; an acceptance of the situation and the embracing of a high degree of humility to steer through the crisis. Because one whetted the appetite of bankers eager to lend and in a sense were in control of the situation is now a matter of the past, today its a different set of circumstances and counting friends is as important as cultivating new ones.
If I was Dubai World here is what I would do:
1. Seek a quick and equitable solution with the banks. Make this a priority above all else.
2. Given them the true picture of the health, or lack of it, today and show them the plan over say a five year period of how things are likely to change. Build scenarios, from the conservative to the most optimistic; the truth of what will happen lies in between.
3. Seek their advice where they offer it, and most importantly LISTEN.
4. What Dubai World needs to achieve is to fix the mismatch of its borrowing from the short term to the longer term, but this needs to be matched to a plan and not a simple roll over in a vacuum. Bankers need to know when they will be paid and how?
5. Do not take any confrontational stance, avoid words like 'standstill', 'rebates', 'write offs' and 'discounts'.
6. Do not threaten to seek bankruptcy this is no more an option given that everyone has expressed a public stance of solving the debt issue and remarkable progress has been made, some, ofcourse, with the support from Abu Dhabi.
7. Remember always, and this also applies to banks, that when you negotiate do not put people in the corner, then they act irrationally. A good negotiator keeps the other party in the center of the room so they can see all the exits and options,
8. Make it clear that there can be longer term repayments and these will need the support of the banks if they want to be repaid and allow for accelerated payments if the better, more optimistic scenarios start to unravel.
9. Given the recent two months of focus on these issues, this is no more an issue that ONLY concerns Dubai World, it effects the UAE and indeed even the region. This is the test of credibility and commitment.
10. Always remember that not all banks want this to be a battle of brinkmanship so it does not do good to walk the tight line each time.
For those who think that all the money went into a endless pit in the sand they too must realize that there are assets; land and other assets that Dubai World owns elsewhere. Yes the land is impaired in value, but it has some infrastructure on it and land may go sick for a while but it never dies. Eventually these land values will recover and this is a matter of patience, all that is needed is to realize that when you nurture confidence and do things to build confidence then this helps the recovery process. The world will not remain in a perpetual state of recession and this is also true of Dubai.
It was mentioned somewhere in the press that in January 2010 we would see progress on the restructuring talks between the banks and Dubai World. It is important that this process continues and information is made more available that indeed such meetings may well be going on. But get the news out that there is a dialogue; a much better message then people guessing what is going on.
Over all we must remember that indeed this a matter that can be resolved, the banks want it resolved and so does Dubai World. It is now a question of finding out what will be the meeting place of this resolve. This is a much better place to be in than neither side wanting to negotiate, yet there has to be give and take. The circumstances dictate that and demand that. Pride, on either side of the table should be put aside, as must the opinions of lawyers who may prefer to be pit bulls wanting to fight rather than legal counsels assisting in an equitable solution.
I believed that the Sukuk that started this whole saga would be paid and it was. I also believe that a restructuring will happen, even though at times it might seem everyone has hit a brick wall and tension will heighten. The truth is that everyone knows too much is at stake for it not to happen.
Some of the biggest names in the business world have fallen on hard times, this is part of the financial history we know, and any study of them and their successful come back is based on one truth; an acceptance of the situation and the embracing of a high degree of humility to steer through the crisis. Because one whetted the appetite of bankers eager to lend and in a sense were in control of the situation is now a matter of the past, today its a different set of circumstances and counting friends is as important as cultivating new ones.
If I was Dubai World here is what I would do:
1. Seek a quick and equitable solution with the banks. Make this a priority above all else.
2. Given them the true picture of the health, or lack of it, today and show them the plan over say a five year period of how things are likely to change. Build scenarios, from the conservative to the most optimistic; the truth of what will happen lies in between.
3. Seek their advice where they offer it, and most importantly LISTEN.
4. What Dubai World needs to achieve is to fix the mismatch of its borrowing from the short term to the longer term, but this needs to be matched to a plan and not a simple roll over in a vacuum. Bankers need to know when they will be paid and how?
5. Do not take any confrontational stance, avoid words like 'standstill', 'rebates', 'write offs' and 'discounts'.
6. Do not threaten to seek bankruptcy this is no more an option given that everyone has expressed a public stance of solving the debt issue and remarkable progress has been made, some, ofcourse, with the support from Abu Dhabi.
7. Remember always, and this also applies to banks, that when you negotiate do not put people in the corner, then they act irrationally. A good negotiator keeps the other party in the center of the room so they can see all the exits and options,
8. Make it clear that there can be longer term repayments and these will need the support of the banks if they want to be repaid and allow for accelerated payments if the better, more optimistic scenarios start to unravel.
9. Given the recent two months of focus on these issues, this is no more an issue that ONLY concerns Dubai World, it effects the UAE and indeed even the region. This is the test of credibility and commitment.
10. Always remember that not all banks want this to be a battle of brinkmanship so it does not do good to walk the tight line each time.
For those who think that all the money went into a endless pit in the sand they too must realize that there are assets; land and other assets that Dubai World owns elsewhere. Yes the land is impaired in value, but it has some infrastructure on it and land may go sick for a while but it never dies. Eventually these land values will recover and this is a matter of patience, all that is needed is to realize that when you nurture confidence and do things to build confidence then this helps the recovery process. The world will not remain in a perpetual state of recession and this is also true of Dubai.
It was mentioned somewhere in the press that in January 2010 we would see progress on the restructuring talks between the banks and Dubai World. It is important that this process continues and information is made more available that indeed such meetings may well be going on. But get the news out that there is a dialogue; a much better message then people guessing what is going on.
Over all we must remember that indeed this a matter that can be resolved, the banks want it resolved and so does Dubai World. It is now a question of finding out what will be the meeting place of this resolve. This is a much better place to be in than neither side wanting to negotiate, yet there has to be give and take. The circumstances dictate that and demand that. Pride, on either side of the table should be put aside, as must the opinions of lawyers who may prefer to be pit bulls wanting to fight rather than legal counsels assisting in an equitable solution.
I believed that the Sukuk that started this whole saga would be paid and it was. I also believe that a restructuring will happen, even though at times it might seem everyone has hit a brick wall and tension will heighten. The truth is that everyone knows too much is at stake for it not to happen.
Sunday, January 3, 2010
Burj Dubai: Symbol of Vision
On Jan 4, 2010, the main Sh Zayed Road, alongside which the Burj Dubai is situated, will, from late afternoon, witness a bumper to bumper traffic jam as people will rubber neck to see the 800 meter tower be unveiled to a world that held its disbelief for some six years. While the events of 2009, especially the last quarter, may have dampened the spirit of inaugurations, there is going to be no holding back as the ceremony marking its opening will commence. In the area around the tower those fortunate enough to be invited to the event will leave just about as much space as a taxi packed with hippopotamus will allow. Emmar Properties, the owners of this symbol of modernism will carry the pride of their work, hopefully also acknowledging the hard work of thousands of laborers who toiled to make this dream happen.
Yet, more than the adroit steadfastness of Mohammed al Abbar, who heads Emaar, the vision of Sh Mohammed bin Rashid al Maktoum, the Ruler of Dubai and Prime Minister of UAE, will be showcased. Indeed that vision may have been scaled back by the setbacks of Dubai World, but there will be rejoicing that Emaar did the impossible, not only for the vision of Dubai but for the UAE. At the same time the media is ofcourse looking at the future of the economics of such a grandiose tower. Admittedly such iconic buildings are not built to make money by the truck load, but more to act a beacons of progress and development. Indeed the Empire State Building took 19 years before it became profitable, and indeed did other such iconic towers take longer to break even. These buildings were built to become symbols of attraction and this is what Burj Dubai would also be for some years before it turns to be entirely profitable.
However, it remains to be seen if the cheer of such a launch will rub off onto the the depressed real estate market within the country. I am perhaps the optimist who refuses to see the glass empty, but there is no merit in the argument that there is an over supply looming in the horizon. While domestic population in Dubai may shrink by as much as 10% over the next two years, we should not forget that this shrinkage happens at the lower end of the job scales. While indeed 40,000 additional units on the market will create over supply conditions I do not see anything wrong with this as its time that greedy landlords also appreciate that an oversupply does mean that the rents will come down. This means the cost of doing business will indeed come down too. I also believe financial constraints, project delays and the general uncertainty in the market will mean that these 40,000 units will be phased into the market at a slower pace. People are worried that only 70% of the new units will be leased out, but then this is fine, as it allows a better balance to the market where leasing rates went out of control.
When the search lights and strobes will unveil the tower we will also notice the contrasting styles of Nakheel and Emaar. While the Burj Dubai will remain the icon in Emaar's cap, it has to also be credited as the one developer in the UAE who has actually delivered. The main feather in Mr. Abbar's cap will be that Emaar has delivered more completed real estate in the country than anyone else, and indeed this is something that they should to proud off. Yes some may argue that it may have over extended itself but we must acknowledge that it was no mean feat to build a 800 meter tall tower and the many other projects it completed. The question now will remain whether this alone will act as a watershed to commence the recovery of the real estate market?
While the financial press will do its utmost to spoil the party with the oft repeated remarks about the looming $22 billion debt of Dubai World, my own sense is that now a restructuring is pretty much on the cards. The twin effect of the Burj Dubai being open and the debt restructuring being completed will be positive and reinforcing. There will be differing views on whether the extravagance of having the world's largest tower was a necessity or not. This is now irrelevant as the concept of Burj Dubai was at a time when all things big were being considered and somehow the necessity to be in the Guinness Book of Records was paramount. Soon after the Burj Dubai was announced Nakheel, Dubai World's subsidiary, decided they needed a tower even higher, not to mention there were some private developers who secretly also craved the same idea. If nothing else the recent slowdown and the problems that have come with it have dampened those spirits with good reason.
The vision of equally tall towers popping up on the Dubai landscape will now be into the future and perhaps a very distant future. I personally hope that this will be considered the last of the 'tall ones' as other than satisfy ego and to be an icon there is no immediate need for another 800 meter tower. Dubai already has a few architectural icons and there is indeed no need to more to that list. Someone asked me about the vision for Dubai that was unveiled from 2003 and then refined at times is still intact or not?
The idea of being the entertainment capital for the region and the metropolis that competed with the best of the world is perhaps never wrong to conceive. I suspect the grand scale that was planned was being implemented too rapidly. Yes projects like Dubailand, Al Bawadi (a few kilometer strip of hotels) and the grand plans of Nakheel are either slowed down or perhaps will need to be chopped up. The exuberance of development was such that some ideas were just not financially practical but were being touted around with the glee of a child in a candy shop. Underwater hotels, revolving towers (one in which each floor revolved), designer labeled towers, theme parks that could perhaps attract a handful of people being compared to the likes of Disney all were welcomed in the enthusiasm of creating something new and something on a scale bigger than life. Anyone who questioned the economic viability of the ideas or the pace at which all this was happening remained the unheard voice. Projects like theme parks and massive residential complexes will be on the back burner for some years to come and this is a good thing. First the fundamentals have to be restored, the idea of the grand has to be replaced with the practical and as the financial system adjusts to the new realities it will also bring a more durable strength to the system.
Does this mean the vision of Dubai will not happen?
I would rather say it will not happen in the three to four year period but more as a part of perhaps a 20 year plan. There is nothing wrong with this dose of realism. I remember in the early 1990's and soon after the first Gulf War, Sh Zayed road was popping up as the new development area. A prominent businessman from Abu Dhabi decided he will be build the Holiday Inn Crown Plaza and everyone wondered what was going through his mind. As others followed suit and buildings started to come up analysts questioned whether there was a viable future for these buildings on Sh Zayed road. Yes it all seemed before its time and today too one can say some of the projects were before their time and some perhaps a decade too early. I believe the vision was not wrong at all, but the speed of trying to realize it all created pressures that were just too hard to handle, especially when the global downturn happened.
In this sense the opening of the Burj Dubai will mark the end of an decade of exuberance and show that the new decade must now be one of repair and consolidation. Yet in the landscape of the country the landmark will become, like the Burj Al Arab was for over a decade, a symbol not only of pride, but identification with an element of success that will be seen with either envy or admiration.
Yet, more than the adroit steadfastness of Mohammed al Abbar, who heads Emaar, the vision of Sh Mohammed bin Rashid al Maktoum, the Ruler of Dubai and Prime Minister of UAE, will be showcased. Indeed that vision may have been scaled back by the setbacks of Dubai World, but there will be rejoicing that Emaar did the impossible, not only for the vision of Dubai but for the UAE. At the same time the media is ofcourse looking at the future of the economics of such a grandiose tower. Admittedly such iconic buildings are not built to make money by the truck load, but more to act a beacons of progress and development. Indeed the Empire State Building took 19 years before it became profitable, and indeed did other such iconic towers take longer to break even. These buildings were built to become symbols of attraction and this is what Burj Dubai would also be for some years before it turns to be entirely profitable.
However, it remains to be seen if the cheer of such a launch will rub off onto the the depressed real estate market within the country. I am perhaps the optimist who refuses to see the glass empty, but there is no merit in the argument that there is an over supply looming in the horizon. While domestic population in Dubai may shrink by as much as 10% over the next two years, we should not forget that this shrinkage happens at the lower end of the job scales. While indeed 40,000 additional units on the market will create over supply conditions I do not see anything wrong with this as its time that greedy landlords also appreciate that an oversupply does mean that the rents will come down. This means the cost of doing business will indeed come down too. I also believe financial constraints, project delays and the general uncertainty in the market will mean that these 40,000 units will be phased into the market at a slower pace. People are worried that only 70% of the new units will be leased out, but then this is fine, as it allows a better balance to the market where leasing rates went out of control.
When the search lights and strobes will unveil the tower we will also notice the contrasting styles of Nakheel and Emaar. While the Burj Dubai will remain the icon in Emaar's cap, it has to also be credited as the one developer in the UAE who has actually delivered. The main feather in Mr. Abbar's cap will be that Emaar has delivered more completed real estate in the country than anyone else, and indeed this is something that they should to proud off. Yes some may argue that it may have over extended itself but we must acknowledge that it was no mean feat to build a 800 meter tall tower and the many other projects it completed. The question now will remain whether this alone will act as a watershed to commence the recovery of the real estate market?
While the financial press will do its utmost to spoil the party with the oft repeated remarks about the looming $22 billion debt of Dubai World, my own sense is that now a restructuring is pretty much on the cards. The twin effect of the Burj Dubai being open and the debt restructuring being completed will be positive and reinforcing. There will be differing views on whether the extravagance of having the world's largest tower was a necessity or not. This is now irrelevant as the concept of Burj Dubai was at a time when all things big were being considered and somehow the necessity to be in the Guinness Book of Records was paramount. Soon after the Burj Dubai was announced Nakheel, Dubai World's subsidiary, decided they needed a tower even higher, not to mention there were some private developers who secretly also craved the same idea. If nothing else the recent slowdown and the problems that have come with it have dampened those spirits with good reason.
The vision of equally tall towers popping up on the Dubai landscape will now be into the future and perhaps a very distant future. I personally hope that this will be considered the last of the 'tall ones' as other than satisfy ego and to be an icon there is no immediate need for another 800 meter tower. Dubai already has a few architectural icons and there is indeed no need to more to that list. Someone asked me about the vision for Dubai that was unveiled from 2003 and then refined at times is still intact or not?
The idea of being the entertainment capital for the region and the metropolis that competed with the best of the world is perhaps never wrong to conceive. I suspect the grand scale that was planned was being implemented too rapidly. Yes projects like Dubailand, Al Bawadi (a few kilometer strip of hotels) and the grand plans of Nakheel are either slowed down or perhaps will need to be chopped up. The exuberance of development was such that some ideas were just not financially practical but were being touted around with the glee of a child in a candy shop. Underwater hotels, revolving towers (one in which each floor revolved), designer labeled towers, theme parks that could perhaps attract a handful of people being compared to the likes of Disney all were welcomed in the enthusiasm of creating something new and something on a scale bigger than life. Anyone who questioned the economic viability of the ideas or the pace at which all this was happening remained the unheard voice. Projects like theme parks and massive residential complexes will be on the back burner for some years to come and this is a good thing. First the fundamentals have to be restored, the idea of the grand has to be replaced with the practical and as the financial system adjusts to the new realities it will also bring a more durable strength to the system.
Does this mean the vision of Dubai will not happen?
I would rather say it will not happen in the three to four year period but more as a part of perhaps a 20 year plan. There is nothing wrong with this dose of realism. I remember in the early 1990's and soon after the first Gulf War, Sh Zayed road was popping up as the new development area. A prominent businessman from Abu Dhabi decided he will be build the Holiday Inn Crown Plaza and everyone wondered what was going through his mind. As others followed suit and buildings started to come up analysts questioned whether there was a viable future for these buildings on Sh Zayed road. Yes it all seemed before its time and today too one can say some of the projects were before their time and some perhaps a decade too early. I believe the vision was not wrong at all, but the speed of trying to realize it all created pressures that were just too hard to handle, especially when the global downturn happened.
In this sense the opening of the Burj Dubai will mark the end of an decade of exuberance and show that the new decade must now be one of repair and consolidation. Yet in the landscape of the country the landmark will become, like the Burj Al Arab was for over a decade, a symbol not only of pride, but identification with an element of success that will be seen with either envy or admiration.
Saturday, December 26, 2009
The Silver Lining.
Telling someone that one is based in Dubai, or the UAE, these days is tantamount to admitting that one is under the strains of a financial system that is groaning under debt and piles of newspaper analysis, which range from brilliant to pure junk. While there is not doubt that the fall out from Lehman Brothers in the US in September 2008 took a while to be understood in UAE and the Gulf, especially in terms of its possible impact. This was certainly the case of most countries in the world who felt the US economic problems were isolated and their global impact would be marginal. How wrong we all were, as it was often said when the US economy sneezes the world economy catches a cold; in this case this is not a cold, this is full blown bronchitis.
Dubai perhaps was in a state of denial as to the impact that was seething below the surface, with prominent officials making upbeat statements right into the face of the storm that was approaching. But enough of the dissections of the situation. I believe that this situation has caused some benefits that might well be ignored by people. I believe these are the silver linings on the clouds that need to be seen and pondered upon. I list them in no particular order of preference.
1. Governance and transparency will become the watch words of the coming decade. The UAE as a whole, and Dubai in particular, has, reading between the lines, realized that the maverick ways of doing business will not just work from here onwards. Yes they have a wonderful vision but with that vision a sense of clarity and focus are to remain paramount. A greater adherence to critical reviews and financial planning will be the result of this. I believe, at a Federal level, the UAE will want to monitor how their financial system, and more importantly the quasi government entities conduct their business will be under more closer review and oversight.
2. Dubai will need to go back to the basics. Traditionally the soul of Dubai's economy was the commerce generated by the trading houses; it is this sector that was ignored in the rush to become a metropolis of high rise buildings. It has been the trading hub that Dubai gained its reputation on and this is where the superior infrastructure in terms of ports and facilities will come into play. As demand grows in the Sub Continent, Iran and Iraq the service ability of UAE and Dubai will become of paramount importance giving the traders the traditional advantage they have held for so long.
3. Dubai's underlying story has not been shattered, it has been ofcourse seriously dented, and the repair work is going to be on the back of a restructured financial position, focusing back to the enabling economy model that allows businesses to thrive and do well here. The financial hub, the technology hub and the trading hub status will come back into focus. While pundits predict that properties will remain subdued, I anticipate from 2010 a 5% annual rise in property prices, on average, through the next 6 years. While this may seem minuscule to the dizzy levels of a couple of years ago, so be it. Some smart Germans even announced they will proceed with their development on the World Islands, perhaps aware that when in 3 years time they complete construction they will be walking into a recovery.
4. The focus of a more Federally driven economy will be the key aspect to consider. This is indeed good and this crisis has brought focus back to one nation and one economy as a model for moving forward. This cannot be bad for the economy and its future, and I do feel all these statements about political compromises are really humbug. This new economic focus on a Federally driven economy will actually benefit Dubai in more ways that one, mostly by allowing the integration of the infrastructure covering areas of public transport, power generation and perhaps eventually ports management.
5. UAE position within the GCC as the most favored place to do business from has not been compromised in this crisis. On the contrary they have not gone an blamed the excesses of foreign property developers and indeed have held their words even against their own plans. Quite simply the floor fell of the real estate market and whether this was the reason the debt implosion happened or because of a world wide financial contagion will always remain open to debate.
6. Finally the business laws and financial management of the system will become more streamlined. This will be a welcome step for the business sector. It might be a teething process but it is clear the regulation and over sight support by a sound business judicial system can only mean well for all.
Indeed there will ups and downs in the process. The first and most pressing issues will be the restructuring of the balance of the debt of Dubai World, which the bankers and lenders eagerly await into the new year. I tabulated, from the public media, maturity profile of the debt in Dubai, and the UAE and it is interesting to note that if banks were to consider around $ 12 billion to restructured from a 2 year maturity profile to a 5 year maturity profile then indeed the pressures what seem so immediate will be released. At the end of the day this breathing space is needed for the positive economic fundamentals to come into play. The service sector remains strong and indeed the tourism industry has actually performed remarkably better than expected. These are the silver linings we are missing, and while pulling out the check books and putting money into real estate may not be the first thing that comes to mind there is no doubt that not being a player in this economy is not the right thing to do.
Yes Dubai, especially, must cut back on its long term project plans and make them fit the needs that they realistically assess, and side by side phase the development from here on. They must also realize that a fair amount of the splurging of the past years was indeed wasteful and even at times questionable. This is why the return to basis is so vital at this stage to be emphasized by all and sundry.
Dubai perhaps was in a state of denial as to the impact that was seething below the surface, with prominent officials making upbeat statements right into the face of the storm that was approaching. But enough of the dissections of the situation. I believe that this situation has caused some benefits that might well be ignored by people. I believe these are the silver linings on the clouds that need to be seen and pondered upon. I list them in no particular order of preference.
1. Governance and transparency will become the watch words of the coming decade. The UAE as a whole, and Dubai in particular, has, reading between the lines, realized that the maverick ways of doing business will not just work from here onwards. Yes they have a wonderful vision but with that vision a sense of clarity and focus are to remain paramount. A greater adherence to critical reviews and financial planning will be the result of this. I believe, at a Federal level, the UAE will want to monitor how their financial system, and more importantly the quasi government entities conduct their business will be under more closer review and oversight.
2. Dubai will need to go back to the basics. Traditionally the soul of Dubai's economy was the commerce generated by the trading houses; it is this sector that was ignored in the rush to become a metropolis of high rise buildings. It has been the trading hub that Dubai gained its reputation on and this is where the superior infrastructure in terms of ports and facilities will come into play. As demand grows in the Sub Continent, Iran and Iraq the service ability of UAE and Dubai will become of paramount importance giving the traders the traditional advantage they have held for so long.
3. Dubai's underlying story has not been shattered, it has been ofcourse seriously dented, and the repair work is going to be on the back of a restructured financial position, focusing back to the enabling economy model that allows businesses to thrive and do well here. The financial hub, the technology hub and the trading hub status will come back into focus. While pundits predict that properties will remain subdued, I anticipate from 2010 a 5% annual rise in property prices, on average, through the next 6 years. While this may seem minuscule to the dizzy levels of a couple of years ago, so be it. Some smart Germans even announced they will proceed with their development on the World Islands, perhaps aware that when in 3 years time they complete construction they will be walking into a recovery.
4. The focus of a more Federally driven economy will be the key aspect to consider. This is indeed good and this crisis has brought focus back to one nation and one economy as a model for moving forward. This cannot be bad for the economy and its future, and I do feel all these statements about political compromises are really humbug. This new economic focus on a Federally driven economy will actually benefit Dubai in more ways that one, mostly by allowing the integration of the infrastructure covering areas of public transport, power generation and perhaps eventually ports management.
5. UAE position within the GCC as the most favored place to do business from has not been compromised in this crisis. On the contrary they have not gone an blamed the excesses of foreign property developers and indeed have held their words even against their own plans. Quite simply the floor fell of the real estate market and whether this was the reason the debt implosion happened or because of a world wide financial contagion will always remain open to debate.
6. Finally the business laws and financial management of the system will become more streamlined. This will be a welcome step for the business sector. It might be a teething process but it is clear the regulation and over sight support by a sound business judicial system can only mean well for all.
Indeed there will ups and downs in the process. The first and most pressing issues will be the restructuring of the balance of the debt of Dubai World, which the bankers and lenders eagerly await into the new year. I tabulated, from the public media, maturity profile of the debt in Dubai, and the UAE and it is interesting to note that if banks were to consider around $ 12 billion to restructured from a 2 year maturity profile to a 5 year maturity profile then indeed the pressures what seem so immediate will be released. At the end of the day this breathing space is needed for the positive economic fundamentals to come into play. The service sector remains strong and indeed the tourism industry has actually performed remarkably better than expected. These are the silver linings we are missing, and while pulling out the check books and putting money into real estate may not be the first thing that comes to mind there is no doubt that not being a player in this economy is not the right thing to do.
Yes Dubai, especially, must cut back on its long term project plans and make them fit the needs that they realistically assess, and side by side phase the development from here on. They must also realize that a fair amount of the splurging of the past years was indeed wasteful and even at times questionable. This is why the return to basis is so vital at this stage to be emphasized by all and sundry.
Monday, December 21, 2009
The Dubai World debt puzzle.
I get accused these days of being a Dubai 'fan', all the more strange since I hope I have been pragmatic in my advice to both sides. Yes there is not denying that I do love the UAE, it has a great deal what is good and when it has needed improvement I have spoken out, not as a cynic but as a friend who means well. I have been a banker for a major part of my life, and have viewed banking and bankers from a close distance this past ten years.
As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.
Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.
But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.
My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.
I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.
This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.
As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.
Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.
But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.
My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.
I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.
This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.
Sunday, December 20, 2009
Around the Debt Table
One of the crucial lessons of banking is that when you lend someone say $1 million you, as a banker, have a commanding position with the borrower, but when you lend him $26 billion, as is the case of the Dubai World bankers, then frankly speaking you cannot afford to take as tough a position as you may seek. As dismal as that may sound, Dubai World, Dubai and the UAE also have a reputation they want to protect and ofcourse heal the recent acrimonious display of relations with lenders and bond holders. Armed with a new bankruptcy law, administered by some of the best western legal minds, does mean that creditors of Dubai World will have to get used to the legal formalities of such laws in the case of debt recoveries. The litmus test that will apply in such reorganization applications is that a) the company made its best efforts to convince the creditors on its reorganization plan, b) the plan provides relief to the company to reorganize itself and implement a plan that c) provides the economic possibility of a recovery better than say a fire sale would at the present.
If this test is met then the judges will be inclined to allow the company the time and the patience to meet the objectives of the plan and something the creditors may well have to swallow. Indeed, UAE entities will be penalized over the cost of new borrowing should this be the route taken.
However, my call is that when the bankers sit around the table with the company and its advisers there has to be a sense of balance that they will have to gauge. Its all fine to be publicly emotional about the whole sordid episode but we are dealing with huge sums of money and bankers cannot, and should not, let their ego's into the way. I would suspect if the plan is workable, and this is reasonably demonstrated in such a meeting then banks could agree to a restructuring of their loans in a manner which allows them interest payments and a defined structure for the future repayments of the principal amount lent.
On Dubai World's side, just because the recent legislation gives them negotiating clout does not mean they wield it. Some of the best deals break down when people get stubborn over what in the end are minor issues. Dubai World should, in my opinion look at some of the assets it holds and assure the banks that there is a plan for the sale of these assets and to satisfy them that their entire lending did not go down into a bottomless pit. Yes the land bank held by Dubai World's property arms is seriously impaired, but realistically speaking real estate may get sick from time to time but it never does really die. If the wait period is say 5 years under a restructured plan then there is a high chance that some of these impaired values may well recover, while not the to dizzy heights of two years back, but certainly well off the bottom that we saw a month back.
Dubai`World will have to also think more pragmatically and let go those plans that do not seem feasible at the moment. There is no joy in hanging onto a master plan of a project when it is highly unlikely for it to materialize in the next few years. What bankers and lenders need assurance is that the realities of the market situation are recognized and there is a willingness to cut the cloth to that size. I do know that some bankers will remain adamant about being repaid in full, perhaps buoyed by the recent news that in talks in London senior Dubai officials said repaying all the debts in full was an option. However, testing that will through the bankruptcy court is not a wise choice. I would always say that sometimes a bad settlement is better than a good court case.
I do feel that bankers are well advised to hammer out a balanced agreement and assist in the restructuring of the company. This is really the way forward that gives enough elbow room for everyone to move forward and has the best chance of being in a position that is better then where things stand today.
If this test is met then the judges will be inclined to allow the company the time and the patience to meet the objectives of the plan and something the creditors may well have to swallow. Indeed, UAE entities will be penalized over the cost of new borrowing should this be the route taken.
However, my call is that when the bankers sit around the table with the company and its advisers there has to be a sense of balance that they will have to gauge. Its all fine to be publicly emotional about the whole sordid episode but we are dealing with huge sums of money and bankers cannot, and should not, let their ego's into the way. I would suspect if the plan is workable, and this is reasonably demonstrated in such a meeting then banks could agree to a restructuring of their loans in a manner which allows them interest payments and a defined structure for the future repayments of the principal amount lent.
On Dubai World's side, just because the recent legislation gives them negotiating clout does not mean they wield it. Some of the best deals break down when people get stubborn over what in the end are minor issues. Dubai World should, in my opinion look at some of the assets it holds and assure the banks that there is a plan for the sale of these assets and to satisfy them that their entire lending did not go down into a bottomless pit. Yes the land bank held by Dubai World's property arms is seriously impaired, but realistically speaking real estate may get sick from time to time but it never does really die. If the wait period is say 5 years under a restructured plan then there is a high chance that some of these impaired values may well recover, while not the to dizzy heights of two years back, but certainly well off the bottom that we saw a month back.
Dubai`World will have to also think more pragmatically and let go those plans that do not seem feasible at the moment. There is no joy in hanging onto a master plan of a project when it is highly unlikely for it to materialize in the next few years. What bankers and lenders need assurance is that the realities of the market situation are recognized and there is a willingness to cut the cloth to that size. I do know that some bankers will remain adamant about being repaid in full, perhaps buoyed by the recent news that in talks in London senior Dubai officials said repaying all the debts in full was an option. However, testing that will through the bankruptcy court is not a wise choice. I would always say that sometimes a bad settlement is better than a good court case.
I do feel that bankers are well advised to hammer out a balanced agreement and assist in the restructuring of the company. This is really the way forward that gives enough elbow room for everyone to move forward and has the best chance of being in a position that is better then where things stand today.
Wednesday, December 16, 2009
UAE Bashing- time to stop it.
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.
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.
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.
Monday, November 30, 2009
The Dubai World saga.
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.
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.
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