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Shares in both Dubai and Abu Dhabi traded downwards as concerns of dilution of shares from blue-chip stocks, Dubai-listed Arabtec Contractors and Abu Dhabi-listed Al Dar Developers weigh on investors.

 

Negative news about leading UAE companies were the worst to hit the UAE since the Dubai crisis culminated in November 2008. Arabtec, one of the largest Arab region contracting firms, announced that it was seeking approval to issue a convertible bond, in addition to issuing new shares.

During the same week, Abu Dhabi Government said it is likely to increase its stake in Aldar Properties, the largest developer in the UAE capital. The property developer said it was considering selling certain assets in addition to a convertible issuance.

 

Aldar were due to convene its board later in the week to discuss the sale of assets, the issue of convertible bonds, and the conversion of an existing bond owned by Mubadala Development, an Abu Dhabi sovereign wealth fund, Aldar said. The disclosure comes after months of speculation on how the government would come to the aid of the company as it contends with a weak property market and more than AED 10 billion (US$2.72bn) of debt coming due this year.

 

The Abu Dhabi government currently owns 38 percent of Aldar through direct and indirect stakes. The conversion of the existing bond held by Mubadala, would bring that state ownership to 44 per cent. Any new bonds would be likely to push the government's holding to above 50 percent.

 

Aldar reported a AED 731.2 million loss in the third quarter of last year, compared with a profit of AED 270.1m in the year-earlier period. The company also saw the replacement of its chief executive, John Bullough, with Sami Asad in November. The company's total debts stand at AED 22.4bn.

 

January 12, 2011

 

 

Analysis and Forecast: Increasing Risk


 

The events surrounding Arabtec and Aldar are unrelated, however both coming during the same period, raises question marks about the ability of the UAE to maintain its competitive edge.

 

Arabtec – one of the Gulf’s leading construction firms, has been particularly hit hard with the collapse of the real-estate and construction sectors in Dubai in 2009. Last month, its long-time chairman Ziad Kamal was suspended from share-dealing for six months in an unprecedented move by UAE authorities. The fact that the company now looking to issue convertible bonds and issue new shares confirms that all other avenues to it have been exhausted. The company has had massive outstanding debt from Dubai government-owned entities, such as Nakheel.

 

The difficulty Arabtec faces seriously threatens one of Dubai’s leading blue-chip companies and a collapse could massively undermine the economy.

 

More seriously for the UAE in general, are the difficulties facing the Abu Dhabi listed Aldar developers. Aldar is one of the largest master developers in Abu Dhabi, responsible for much of the emirate’s development, attracting foreign investment and ultimately long-term diversification plans. Aldar has faced serious difficulties in 2010, and Political Capital has warned about the repercussions of the risks involved.

 

Abu Dhabi has established Aldar, and other master developers, to emulate Dubai’s model in attracting foreign investment in real-estate. Prices of real estate in Abu Dhabi have plummeted, though less severely than Dubai. It was felt that Abu Dhabi government would bail out Abu Dhabi government-affiliated developers like Aldar. However, with massive reliance on foreign investment in the real estate, Aldar has accumulated massive debt and is left with a massive stock of unsold property. In addition to the problems posed by the collapse of the real-estate sector, the manner in which the government intends to bail-out Aldar, leading to share dilution, will further shake the confidence of investors in Abu Dhabi. Whilst Abu Dhabi government has sufficient assets to bail Aldar out, confidence in long-term plans of diversification and attracting foreign investment will be shaken by the recent news.

 

Much further clarification is needed by both Aldar and Mubadala but the lack of transparent information about the situation, undermines overall credibility in a manner not dissimilar to the situation faced in Dubai. Abu Dhabi can still salvage the situation, but the longer this takes, the harder it will be to regain confidence.