SPECIAL REPORT

Bated Breath

Ryan Harrison reports on how the Dubai World debt saga will affect international lending to the UAE.

In the aftermath of Dubai World’s shock request for a standstill in US$26bn of distressed debt last November, bankers and international investors immediately hit out at the emirate’s handling of the situation.

Apart from the lack of transparency and timing (announced the day before the Eid holiday, the news spooked markets), investors mainly complained that the government hadn’t made it clear whether it would pick up the tab for Dubai World and its subsidiary Nakheel’s bond repayments.

A meeting of executives at Dubai World and a committee of international banks, including Royal Bank of Scotland, Standard Chartered, HSBC, Lloyds TSB and Bank of Tokyo Mitsubishi, has been ongoing for the past few months.

Its aim is simple: to agree terms on when Dubai World will cough up cash.

The restructuring of US$26bn in debts covers a US$4bn Islamic bond that was paid in December by the Dubai government after Abu Dhabi pledged a bail-out of US$10bn.

Lord Davies, the UK trade minister, who was in Dubai recently and attended one of these crisis debt talks is said to have hailed “signs of progress”.

Lord Davies said that the restructuring would have a short-term impact on confidence in Dubai.

The crisis will force Dubai to adopt more transparent policies, he said, with new governance rules and greater clarity on the lines between the state and the private sector.

Restructuring experts say that the initial confusion over a Dubai government guarantee for Nakheel’s debts was the fault of lazy international shareholders in Dubai companies; a failure to read the contracts they had signed, which clearly stated that there was no such government guarantee.

Daniel Greenwald, the managing partner at Chadbourne & Parke’s Dubai office, says: “I recently advised some Nakheel sukuk holders – international financial investment companies – who were indignant that the Dubai government “reneged” on its guarantee of the sukuk.

“When I noted that the sukuk documents were explicit, in several places, that the government was not guaranteeing the sukuks, the response was, ‘Well, they implied in the press that they would.’ Read the governing documents.”

Greenwald says that too many people – including “sophisticated” international investors and financial institutions – seemed to assume that they could only make money in Dubai, therefore overlooking the potential risks that accompany every jurisdiction in the world.

Given this mind set, proper due diligence and reviews of documents were too often considered to be a waste of time and resources, he says. “Going forward, I would hope that international investors will look at Dubai on its merits, which are strong, and would analyse and handle a Dubai investment as it would any other investment.”

He adds though that there isn’t a clear enough divide between government and privately held – but government owned – entities, especially where the same individuals hold senior positions in both government bodies and government-owned private companies.

“Too often, the same individual is in charge of both the private entity and the regulatory entity in a single sphere of activity, especially within some of the free zones, which creates confusion and conflicts of interest.

“The regulatory or government side management must be separated from the private side management. An aggravating factor is when that same individual then deals with the government agency and/or the government-owned private entity in his own personal capacity,” Greenwald adds.

In the days that followed the initial standstill announcement, Abdulrahman Al Saleh, director general of Dubai’s department of finance, gave a television interview and clarified that: “It is correct that the government owns Dubai World, but the decision when it was set up was that it should receive financing based on the viability of its projects, not on government guarantees. The lenders should bear part of the responsibility.”

Simon Davidson, a partner based in Dubai at DLA Piper, says: “The investors and bondholders are sophisticated investors who should have done their due diligence and reviewed the relevant documentation. This is hardly a Madoff-style Ponzi scheme that we are talking about.

“They were investors in a company and should have fully assessed the risks of investment against the return payable.  It would appear that they assumed that, in the case of the Nakheel sukuk, they were buying government guaranteed sukuk,” he says.

The Nakheel sukuk prospectus specifically disclaims this, says Davidson, and mentions a raft of risk factors, including the ability to recover against Nakheel or Dubai World and the fact that Nakheel is heavily exposed to the real estate market which is by its nature potentially illiquid and difficult to value.

So how will Dubai’s debt crisis impact on its attractiveness in future as an investment destination?

Davidson says: “I think that it is too early to say.  However, if the current issues result in improved transparency in the activities of the Emirate and its government owned/controlled entities, then it is likely that the long-term impact will be positive, not negative.

“In many ways the recent issues have been positive for Dubai, as it appears that the situation has finally reached a point where issues have become public and are being dealt with.

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