Dubai Inc may be in a better position than the rumour mill would have had you believe.
United front on Borse Dubai sends right signals
Borse Dubai, the state-owned, majority owner of Dubai's two stock markets, confirmed on Thursday that it had succeeded in obtaining a one-year, $2.5bn syndicated loan this week, just days before it was due to pay back $3.4bn in previous debt. Amid tight international credit markets and lingering concerns about Dubai's debt load, Borse Dubai revealed that it had enlisted almost a dozen banks from Dubai and Abu Dhabi, as well as banks from China, India and Europe to replace ailing western banks in the deal.
"We are pleased to have successfully concluded this transaction which, despite the difficult market conditions, found support amongst a geographically diverse group of investors," said Essa Kazim, the Borse Dubai chairman.
Equally important, analysts say, is where Borse Dubai will get the other $900 million it needs to make next week's debt payment - from its shareholder, the Dubai Government. Bankers and analysts are calling Borse Dubai's refinancing deal a litmus test for how Dubai and its stable of state-owned companies will handle an estimated $15bn in loan payments due this year in the face of the worst global economic and credit crisis in 70 years.
"It sets a very important precedent as government funds were made available where they were needed," said Fahd Iqbal, the vice president of equity research at EFG-Hermes.
Borse Dubai said that banks participating in the deal included some of those that had lent it the original funds, including HSBC, Japan's Bank of Mitsubishi-UFJ and Dubai's Emirates Bank. But the former Wall Street lenders Goldman Sachs and Citigroup, as well as Barclays of Britain, were absent from the deal. In their place were India's Bank of Baroda, the Industrial and Commercial Bank of China, ING of the Netherlands, Sweden's Sandinaviska Enskilda Banken and Intesa Sanpaolo of Italy. Also joining the syndicate were three more UAE lenders - the Dubai Islamic Bank and two Abu Dhabi banks, the National Bank of Abu Dhabi and Union National Bank.
"It's good news that domestic banks are involved and particularly that banks from Abu Dhabi are participating," said Farouk Soussa, the head of Middle East government ratings at Standard & Poor's. "It counters the negative perceptions and speculation that the Abu Dhabi capital injections generated. This is a positive show that this is one economy and one financial system and there's work being done at the UAE level."
Some analysts and economists were hopeful that Borse Dubai would get federal funding, thereby easing pressure on Dubai's own finances and shoring up the nation's heavily indebted financial capital.
Abu Dhabi's move to inject Dh16bn of capital into five of its own banks raised questions in the market as to whether banks in Dubai could expect such support, and helped raise the cost of insuring Dubai debt to a record. Others say that, while a co-ordinated federal stimulus may be the best way forward, Dubai still has a large amount of cash, at least enough to pay off whatever loans it cannot refinance this year.
"It's actually pretty manageable," said Mr Soussa of Dubai's repayment schedule this year.
Dubai bankrolled its development in the past decade with debt - amounting to $80bn. The idea was that the metropolis Dubai sought to build would generate enough revenue in time to pay back those debts. The global economic crisis, however, put debtors everywhere in a vice, pushing up borrowing costs while pushing down salaries, tax revenues and corporate earnings.
The Institute of International Finance in Washington recently estimated global net inflows of private capital would drop to $165bn this year from a peak of $929bn in 2007, led by a retreat in overseas bank lending from developing economies.
Here in the Gulf, that translated last year into a drop in the amount of bonds issued to $10bn from $23.7bn the year before, according to Moody's Investors Service. This pullback in credit caught the Gulf midway into a building and investment boom that was based on surplus oil revenues.
Moody's estimates that GCC countries need $33bn in refinancing this year, $19bn of it from the UAE. Dubai's refinancing costs account for $15bn of that. Borse Dubai incurred its $3.4bn debt in 2007, when it entered a takeover battle with NASDAQ for the Swedish exchange operator OMX.Borse Dubai ended up in a complicated, $4.9bn deal that gave it 20 per cent of a combined NASDAQ OMX, and 22 per cent of the London Stock Exchange. NASDAQ, in turn, took a one-third stake in Dubai International Financial Exchange, which was renamed NASDAQ Dubai.
The economic boom, easy credit and rising prices that inspired such deals are now over. Domestic banks have virtually ceased lending, and property prices have fallen by an estimated 25 per cent since September. Layoffs have sparked fears of a drop in foreign workers who could leave banks holding unpaid debts and further sap the economy. Standard Chartered Bank expects GDP growth to slow almost to zero. It is against this backdrop that Borse Dubai started talks with bankers last month to refinance its loan, which is due for payment on Feb 28. Borse Dubai offered bankers more than double its original interest rate, and will pay them 3.25 percentage points above the benchmark international lending rate - the London interbank offered rate, or Libor - which, at present rates, would be about 4.4 per cent.
After managing to borrow the full $2.5bn, analysts point out that the remaining $900m that Borse Dubai owes will need to come from its largest shareholder, the Dubai Government, which owns Borse Dubai through the Investment Corporation of Dubai (ICD).
The government-owned DIFC Investments owns 20 per cent and Dubai Financial Group, a subsidiary of Dubai Holdings, owns another 20 per cent. Borse Dubai's success in borrowing, and Dubai's success in giving it the cash to avoid coming up short, analysts say, sets the stage for the rest of Dubai Inc as it seeks to borrow later in the year.
Next up is the Dubai Electricity and Water Authority, which needs to pay off $2.2bn by mid-April. The biggest payment comes due in mid-December when the developer, Nakheel, will have to raise $3.52bn to pay off holders of its Islamic bonds. Other Dubai companies have also been choosing to pay down some loans rather than pay higher rates. In December, for example, Dubai World paid off the $890m it still owed on $1.2bn borrowed to buy a stake in MGM Mirage. DIFC Investments paid off a $500m loan the same month.
Analysts say ICD is still holding large cash reserves. It borrowed about $6bn last year that is still sitting in local deposits, they say. It is those funds, according to unnamed banking sources quoted by Reuters, that ICD is using to fund Borse Dubai. On top of that, ICD can count on revenue from the other companies in its collection, including Emirates Airline, Dubai Aluminium, Emirates National Oil Company, and the Roads and Transport Authority. Financial data on ICD and its subsidiaries is limited, but analysts estimate those companies may be sitting on as much as $7bn in combined cash, excluding the proceeds of its $6bn loan. Those companies have their own financing needs, though, and economists caution that using cash to pay down debt may be good for Dubai's balance sheet but could blunt the impact of Dubai's plans to increase government spending by 11 per cent this year.
To accurately gauge the emirate's ability to meet further refinancing, however, analysts say they would need to see better estimates of how the global economic downturn will dampen Dubai's revenues.
"Some uncertainty will remain unless we have more disclosure over government finances and also some official announcement regarding the refinancing," said Mr Iqbal.