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Dubai government will recapitalize its Dubai World conglomerate and repay property unit Nakheel's bonds in full, with US $9.5 billion of aid for a debt deal promising creditors all their money back in up to eight years.

 

The long-awaited plan unveiled is Dubai's latest attempt to restructure some of the debt held by Dubai World. The Dubai government said US $5.7 billion in funds from a previous loan made by neighboring emirate Abu Dhabi would provide the lion's share of the overall $9.5 billion, and that it would add around $4 billion of its own resources.

 

Dubai government sources confirmed that there was no new money from Abu Dhabi.

 

Dubai World put a price tag on the total amount of debt held by creditors outside the government's rescue vehicle, the Dubai Financial Support Fund, at $14.2 billion at the end of December. The government said the Nakheel bond repayment depended on creditors accepting the proposal.

The government said it was also offering to recapitalize Dubai World through the equitization of the conglomerate's $8.9 billion debt to the government and with up to $1.5 billion in new funds. The Dubai government also said it would inject $8 billion in new funds and that it would equitize $1.2 billion of the government's claim, effectively taking full ownership of Nakheel from Dubai World.

 

Bank creditors will be asked to restructure their debt at commercial rates, the government said. Trade creditors would be offered a significant cash payment and a tradable security, the statement said. Core creditors representing 97 banks met last week to finalize months of talks on how Dubai World can restructure the debt, about a quarter of Dubai's debt.

 

March 31, 2010

 

 

Analysis and Forecast: Increasing Risk

 

The news is very good in the short-term as it demonstrates commitment by the Dubai authorities to resolve the crisis and that it is more likely that there will be a full repayment, rather than cut part of it as previously floated. This is partly due to international pressure.

 

The longer-term implications, however still indicate that there is no long-term solution to the overall problem. The following conclusions can be made:

  1. Support from Abu Dhabi is still not coming. Dubai was practically able to raise about US $4 billion, which provides an immediate relief, but is by no means a long-term plan. It is not clear how Dubai will repay the remainder of the debt.
  2. The way the Dubai authorities are portraying the relationship between Dubai World and Dubai government, and whether the debt is sovereign or commercial, is still vague.

If this announcement was made prior to the infamous November 2009’s debt standstill, the damage to Dubai would have been restricted to financial. However, given that this has come several months late, after both the governance and communications capabilities of Dubai have been severely shaken by the handling of the crisis, the overall long-term implications are negative. Although the announcement is positive in that it is a temporary relief and will satisfy creditors in the short-term, it shows that there are still long-term issues surrounding the Dubai problems. This is a short-term financial solution but there are still no serious efforts to resolving the other problems repeatedly raised by Political Capital, namely governance and communications, as well as the longer term financial issues.

 

The figure below shows the approximate maturing debt for Dubai World: