Dubai's finance chief yesterday stressed the difference between government support and guarantees, as leading banks warned the emirate might face bigger liabilities than previously thought. Abdulrahman al Saleh, the director general of the Department of Finance, also suggested it might take longer than six months to complete the debt restructuring at Dubai World, which is seeking to reschedule about US$26 billion (Dh95.5bn) in loans.
"The six-months period will be short for a complete restructuring," Mr al Saleh told Al Arabiya TV. "The focus at this stage will be on the borrowers and contractors." It was not what markets wanted to hear as the Dubai Financial Market General Index fell 6.1 per cent, erasing most of this year's gains and leaving investors uncertain about the full extent of the emirate's debt burden. "It is difficult to overemphasise the need for a timely resolution of Dubai World's debt problems. A protracted negotiation process that leaves creditors with a significant loss would not be in the emirate's best interest," Morgan Stanley analysts Mohamed Jaber and Paolo Batori wrote in an investor note.
Dubai shook global stock markets two weeks ago when it asked for a debt standstill for at least six months. The most imminent payment involves Nakheel, the developer of the emirate's palm-shaped islands. It is due to make a $4bn sukuk repayment on Monday and has a payment grace period until December 28 to settle the debt. As deadline day approaches for Nakheel, investor attention is moving beyond the developer and its indebted parent to focus on other Dubai Government-related entities that may also need to restructure their debts.
Debt restructuring by state-run companies could almost double to $46.7bn, Morgan Stanley said yesterday. UBS also said Dubai's state-run companies would have to repay the equivalent of about 43 per cent of the emirate's GDP within the next two years. Saud Masud, an analyst at UBS, said: "We may witness the most visible stress test for Dubai corporations entailing both legal and financial regulatory frameworks and the resulting implications for investor confidence in the long run."
The Government-controlled Dubai World said last week that it is in talks to renegotiate debt repayments mostly accrued at Nakheel and Limitless, its two property developers. That forms part of an overall $59bn in liabilities. "We believe for any emirate, state or country, addressing debt repayments totalling approximately 43 per cent of GDP in a period of 24 months may potentially pose significant challenges, especially in the economic down cycle," Mr Masud said.
Ratings agencies that measure the creditworthiness of corporations and governments have also increased their scrutiny of Dubai companies. Moody's Investors Service yesterday downgraded six key state-owned companies, making it more expensive for them to raise funds in the future. DP World, the country's flagship conglomerate which owns ports around the globe, and the Dubai Electricity and Water Authority (DEWA), the emirate's main utility company, were pushed into junk territory by the ratings company.
Moody's also lowered by several notches the issuer and debt ratings of Emaar Properties, DIFC Investments, Jebel Ali Free Zone and Dubai Holding Commercial Operations Group. All six companies remain on review for further downgrades. Citibank said the Dubai Government would struggle to meet the debt repayments of the companies it owns if it were asked to do so. It calculated that interest expenses could account for about a third of government spending by 2011.
Investors and ratings agencies are becoming increasingly concerned that the emirate will not extend financial support for debts accumulated by government-related entities that do not have explicit government guarantees. That distinction was once again highlighted in Mr al Saleh's remarks to Al Arabiya. "We would like to emphasise the difference between support and guarantees," he said. "It was clear since the company's establishment that it's not guaranteed."
Moody's lowered its ratings yesterday for this reason, said Philipp Lotter, the senior vice president for GCC corporates at the ratings agency. "Taking into account the government's most recent position, Moody's no longer believes it appropriate to assume timely support that results in any uplift for the ratings of four of the government-related entities," he said. However, Moody's still assumes "limited but sufficient" support for DEWA and DIFC due to their strategic importance to Dubai. Before Dubai World's debt restructuring, many investors as well as ratings agencies assumed implicit support by the government. Now that such support is no longer being taken for granted, banks are assessing the potential for further restructuring elsewhere within the web of Dubai companies.
"It's likely that other government-related entities will announce debt restructuring plans over the near term," Morgan Stanley said in its report. The bank singled out several companies owned by the Dubai Government that may need to restructure their debt urgently. Some analysts now argue that the emirate's total funding needs may actually be far greater than Dubai's estimated overall debt of $84bn. That includes state-owned companies.
Mr Masud said the emirate's "total systemic leverage" stood at $117bn, including the cost to developers to complete unfinished properties should investors default on payments. On Monday, creditors gathered in Dubai for their first formal meeting with Dubai World. While the investors have not yet publicly stated their intentions, Nakheel's options range from full repayment, returning some money at a discount, asking creditors to roll the debt over into a new bond or, in the worst-case scenario, defaulting.