Unfolding efforts by Dubai to restructure its corporate holdings and manage an estimated US$85 billion (Dh312.2bn) in debt appear to be winning the confidence of investors, judging from prices for the emirate's bonds. Dubai Government bonds, which have been rising steadily since last month, continued to climb last week after news that the Government-owned conglomerate Dubai World had shifted assets and executives from the developer Nakheel to its investment arm, Istithmar World.
The moves sent yields on Dubai's sovereign bonds to their lowest point this year and pushed the cost of insuring Dubai's debt down to its lowest since this time last year. To some extent, Dubai is benefiting from surging investor interest in emerging-market assets around the world. Signs of a global economic recovery and concerns about the health of the US dollar have triggered a wave of investment back into the furthest corners of the globe.
"Everyone across the board has benefited from this rally," said Jason Rogers, a director of credit research at Barclays Capital in Singapore. "It's the return of risk appetite and stability of fundamentals." The improving performance of Dubai's debt also appears to indicate ebbing investor concern about the ability of the Government and the companies it controls to service debts racked up during the boom that ended with the global financial crisis last September.
Those debts eventually grew to exceed the size of Dubai's economy. As recently as July, investors considered Dubai a higher risk than either Kazakhstan or Lithuania, judging from the price of credit-default swaps on its bonds. The cost of insuring all three countries' bonds has dropped considerably alongside recovering liquidity and improving global prospects, but Dubai's by relatively more than the others. Dubai is now considered by investors only slightly more likely to default than Lebanon, according to a comparison of swap data by the London-based credit information specialist CMA.
That is a far cry from mid-February, when the financial crisis was raging and the cost of Dubai credit-default swaps rose sharply with concerns about the health of the emirate. Property prices in Dubai have fallen by at least 30 per cent from their peak a year ago, according to statistics from the Dubai Land Department compiled by Reidin.com. In late February, Dubai sold $10bn in bonds to the Central Bank, the proceeds of which its Department of Finance has been using to help Government-controlled companies pay contractors and creditors.
In July, Dubai announced the formation of a financial support fund to manage the disbursement and recovery of those rescue funds, and to oversee the issue of a second $10bn in bonds. Bankers in Dubai have said the Central Bank's $10bn loan undoubtedly came with certain conditions concerning which companies should receive funding and under what circumstances. One condition typical of such restructurings is that recipients of bailout money undergo sometimes painful cuts to trim costs and raise cash.
Dubai Holding, which manages the personal wealth of Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, has already begun consolidating its two investment arms, Dubai International Capital and Dubai Group, as well as its property divisions, as a prelude to an eventual merger with the partly Government-owned developer Emaar. But even more painful restructuring may be in store at Dubai World, which recently disclosed that, between its own debts and those of its subsidiaries, it faced roughly $60bn in consolidated liabilities.
One of the earliest and highest hurdles will be how to pay off the roughly $4.05bn that will be due to Nakheel bondholders in December. The bonds are guaranteed by Dubai World. Nakheel's bonds have rallied in recent weeks because of optimism that Nakheel and Dubai World will be able to count on Government funding if they come up short. The bonds climbed as high as 103, representing a 10 per cent discount to what they are due to pay when they mature on December 14.
The bonds slipped back last week to 102 after news that Dubai World was shifting property assets valued at billions of dirhams from Nakheel to Istithmar World. While evidence of progress in Dubai buoyed its debt, the opposite was true in Abu Dhabi, whose sovereign bonds have been slipping. Last week Fitch Ratings reaffirmed Abu Dhabi's credit rating, but said the Central Bank's holding of Dubai debt may represent a potential liability for the emirate, whose oil wealth the Central Bank would need to fall back on if Dubai could not repay its $10bn in bonds.
Fitch also said that while Dubai seeks to reduce its debt levels, Abu Dhabi has been borrowing more. Abu Dhabi state-controlled companies have borrowed more than $18bn so far this year, it said. firstname.lastname@example.org