x Abu Dhabi, UAEMonday 24 July 2017

Fund chief to redraft business landscape

The new head of the Dubai Financial Support Fund becomes one of the emirate's most influential men, but his role may be more diplomat than auditor.

One of Marwan Abedin's tasks will be to help Nakheel meet more than $4bn in debt payments by December.
One of Marwan Abedin's tasks will be to help Nakheel meet more than $4bn in debt payments by December.

Marwan Abedin is not exactly a household name, but he is now very likely one of the most influential men in Dubai. A career banker, Mr Abedin was appointed earlier this month to run the new Dubai Financial Support Fund (DFSF), the agency that will oversee how Dubai's US$20 billion (Dh73.46bn) in emergency funds are disbursed, deciding which of the companies in the Dubai Inc stable receive how much, and under what conditions.

He will be determining which government-controlled companies must swallow their weaker counterparts and which are swallowed - and presumably which will live or die. Nakheel, Dubai World and even the Investment Corporation of Dubai (ICD) must now, to some extent, answer to him. Mr Abedin therefore stands to redraw the corporate landscape of the nation's financial centre, and with it the UAE's. It won't be easy. Mr Abedin must administer his deals in a way that satisfies not only his employer, the Government of Dubai and Sheikh Mohammed bin Rashid, the Vice President of the UAE and Ruler of Dubai, but also the emirate of Abu Dhabi, which is providing the largest source of cash for the bailout, and the Federal Government, which is ultimately bankrolling the fund.

All of this he must do while grappling with some of the most politically connected men in the UAE, in what may go down as one of the most secretive bailouts of the global financial crisis. Credit-bubble bailouts vary widely in form and function, but they now proceed according to a common pattern. First comes an effort to prop up creditors with liquidity to offset their exposure to the worst-affected companies or sector. Then the restructuring begins, usually brokered by an independent asset-management agency, such as the DFSF.

The agency determines who gets how much, usually demanding some kind of restructuring plan from the recipient. This usually entails rationalising operations, renegotiating the terms of debt with creditors to either reduce the amount owed or extend the amount of time needed to repay it. Only then can the agency determine how much it makes sense to lend to the ailing recipient and what terms to demand in return.

This becomes even trickier when one government or institution has to bail out another government. Because a transfer of ownership would represent a loss of sovereignty, bailout funds cannot be exchanged for equity. So the tendency is to compensate with more stringent conditions to ensure repayment and minimise the potential for future default. So it was when the IMF stepped in to rescue Thailand, Indonesia and South Korea in the financial crisis of 1997 and 1998. The IMF could not take a stake in those governments, so instead it demanded deep reforms that many argued were at least as painful as no bailout at all, and may have actually exacerbated the crisis.

The closest parallel in that episode with present-day Dubai is perhaps the creation in Indonesia of the Indonesian Bank Restructuring Agency (IBRA). Once the IMF had lent money to Indonesia, the IBRA was responsible for overseeing its disbursement to the banking system. Some banks were deemed too sick to save; others were taken over by the government. In the process, the IBRA ended up owning the loans the banks had made to now-insolvent companies. The IBRA was thus put in charge of making sure those companies could pay the banks - and the government - back.

A similar situation now appears to face the UAE in Dubai. Having already supported the banking sector with lending guarantees and liquidity injections, the Government has moved on to restructure the roughly $65bn still owed by Dubai's Government-related companies. The first step was the Central Bank's decision in February to loan Dubai $10bn at 4 per cent a year. The Central Bank now also appears likely to lend it the next $10bn of its $20bn planned bond programme. Because the Central Bank would not want to end up owning stakes in such companies as Borse Dubai or Emirates Group, its loan will have probably come with some major strings attached.

What they are remains not publicly known, but one key change in the financial relationship between the Federal Government and individual emirates was signalled in June, when the Federal National Council passed a law limiting how much any one emirate can borrow to 15 per cent of its economy. The law also requires that emirates seek federal approval before issuing any new debt. What the new law means for Dubai's plans to issue another $10bn in bonds - part of a programme announced before the law was passed - is unclear. What is clear is that managing that issue and determining how it is disbursed will be the responsibility of the DFSF, and Mr Abedin.

A graduate of Wake Forest University in the US, Mr Abedin worked at Merrill Lynch before returning to Dubai. He eventually moved on to the Emirates National Securitisation Corporation (ENSEC), directing the creation of mortgage-backed securities. Bankers familiar with Mr Abedin say he moved into Dubai's Department of Finance about a year ago. His task is complicated by several aspects that are peculiar to Dubai. Unlike most government bailouts, there are no taxpayers, who normally demand not only significant potential upside, but some form of retribution against the executives responsible.

And Dubai and the UAE, bankers say, have also decided not to require companies receiving aid to ask creditors for relief. Doing so, bankers and analysts say, would jeopardise the ability of government-related companies to borrow with the implicit backing of the Government. Instead, the DFSF will try to enable Dubai Inc to service its loans in full. But perhaps the biggest idiosyncrasy in the Dubai restructuring is that the companies needing the rescue are owned by Dubai itself.

One of Mr Abedin's first orders of business will be how to help Nakheel pay off $4.05bn in bonds and interest payments coming due in mid-December, part of the more than $7.2bn analysts estimate Nakheel owes. Nakheel has already started spinning off some assets. Last week it sold its roughly 6 per cent stake in the Australian developer Mirvac for $171m. Nakheel's bonds are guaranteed by Dubai World, which has estimated debts of more than $5.5bn, not including those of its subsidiaries, such as DP World (about $5.8bn in debt) or Drydocks World (debt of about $2.2bn).

That means that Mr Abedin will almost inevitably be negotiating with Sultan bin Sulayem, who is the chairman of both Dubai World and Nakheel, and a director at the ICD. Discussing how to hammer out the ICD's own $6bn in debt will put him across the table from Mohammed al Shaibani, who aside from being the ICD's chief executive is the director of the Dubai Ruler's Court and sits on Dubai's Supreme Fiscal Committee, which oversees Mr Abedin's DFSF.

Fortunately for Mr Abedin, he can be as diplomatic, according to one banker who knows him, as he is sharp. warnold@thenational.ae