The curious case of Dubai World

Summary

• On 25th November, the Dubai government announced its holding company Dubai World ($59bn in total liabilities), which houses its business interests worldwide would be "restructured" with immediate effect.




• The government also said it would ask the creditors of Dubai World to "debt stand still" during the restructuring and to extend maturities to atleast 30 May.




• There is no publicly available split of Dubai World's creditors, its is widely known $3.5bn bond is due from its property division Nakheel PJSC on 14 December.




• Credit default swaps linked to Abu Dhabi rose 34.5 bps to 134.5, according to CMA prices in London. The cost of the contracts increased throughout the Middle East, with Saudi Arabia climbing 11.5 to 86.5 bps and Qatar rising 5.5 bps to 99, according to CMA.

Implication

• The proposed standstill raises teh risk premium associated with $59bn of debt owed by Dubai World.




• Since the Government of Dubai is the owner of Dubai World, this raises the risk premium associted with the government's financial obligations.




• Overnight Moody's and S&P downgraded several state owned Dubai entities.




• This development is obviously unhelpful to the risk premiums associated with the United Arab Emirates, the political federation of which Dubai is a part. A re-rating of risk associted with the UAE and its enities, and a higher and more volatile CDS spreads should be expected.




• Impact on GCC - While sophisticated and efficient markets would be helpful to distinguish between Dubai and other GCC entities, this announcement would certainly not help the other members who would be keen to tap the capital markets in the near future.

Key Risks

• If Nakheel were unable to get government support, then smaller less important developers could face even bigger hurdles. There are 40,000 unfinished resedential units in need of financing in Dubai.




• If oil prices were to suffera sustained setback, this could compund liquidity constraints on selected GCC entities.




• In case of a protracted crisis, investors could question the sustainability of the UAE's currency peg to the USD. A devaluation of the AED would increase repayment costs of loans in foreign currency.

Is the impact of fall-out overhyped ?

• There is a high probability that Abu Dhabi would intervene. Abu Dhabi's sovereign wealth fund has $630bn of assets, according to the Financial Times. Annual net oil exports are $50bn (Abu Dhabi oil production is 2.3 mmbpd, its consumption 0.1 mmbpd). Clearly, Abu Dhabi could use this crisis to reassert its leading role in the region.




• The potential for economic contagion is very low with the UAE accounting for just 0.3% of global GDP.