Debt strategy yields tangible results for Dubai

The first phase of Dubai’s deleveraging is complete. With the US$6 billion deal that resulted in the borrowings of Dubai Group being restructured last month, the emirate’s financial authorities have more or less concluded the leftover business from the 2009 crisis.

Since then, at least $40bn of debt owed by Dubai government-related entities has been renegotiated with creditors. The big chunks involved Dubai World and Dubai Holding, via its subsidiaries Dubai Group and Dubai International Capital, but there were smaller amounts from other privately held businesses.

There remains the question of the $20bn that Abu Dhabi entities made available to Dubai in the dark days of the crisis. Reports that at least some of this has been rolled over have not been officially confirmed but, given the fraternal relationship that exists between the two, most observers believe that an amicable deal has been, or will be, reached on this issue.

All in all, given the lurid headlines of 2009-10, when some so-called experts wrote off the emirate altogether, it has been a comparatively trouble-free exercise. What pain there has been has largely been felt by the creditors, and most of them it seemed were willing to swap the long-term benefit of being part of Dubai’s ongoing economic recovery for some short-term hits to the balance sheet.

With hindsight – and this is not to underestimate the extent of the problems back then – perhaps Dubai’s debt trouble was overstated. For sure, Dubai government-related entities and other companies connected to Dubai Inc had some serious debts, but the matter of Dubai assets was largely overlooked.

For example, the Sovereign Wealth Fund Institute, a respected body in the global financial scene, recently estimated that Investment Corporation of Dubai (ICD), the body that owns the emirate's crown jewels, from Emirates Airline to Dewa and a big stake in Emaar, had a pot of $70bn of assets.

This gives ICD some serious financial firepower. Although the IMF estimates total government-related debt at $130bn in the emirate, assets have to be netted off against this, and a capital bank like ICD is one of the big advantages Dubai has when it comes to financing the next phase of its economic expansion.

There has been speculation that ICD could act strategically in the financial development of the emirate, with privatisation and sell-offs of some of its big assets, like Emirates Airline. But this, although a possibility, is still a long way off.

Dubai’s financial hierarchy has always been suspicious of the danger of selling assets too cheaply, when there is greater value to be had further down the line, and that must be a prime consideration for any of the assets in ICD’s portfolio, especially the star performer, the airline.

However, ICD’s increasing wealth of asset backing could be wielded tactically at a much earlier date. The organisation has shown already that it is prepared to use its financial muscle to help other parts of Dubai through the debt-repayment cycle, with the deal that bought (for an undisclosed sum but probably several hundreds of million dollars) the Atlantis resort on the Palm Jumeirah.

The cash from that deal went to Dubai World, enabling it to recently pay down some of its debts, according to creditor obligations.

There is speculation among Dubai financial professionals that ICD might be prepared to come to Dubai World’s help again. The conglomerate has just over $4bn of debt to repay next year. It has a well-advanced programme of asset sales to meet some of that obligation, but it is not certain it could meet it in full from straightforward disposals to external buyers.

It has one major ace up its sleeve, the valuable holding in DP World. As I pointed out in this column last week, Dubai World could cover its 2015 debts in full with a further sale of shares in DP World, and still retain majority control.

But if it, or the Government of Dubai, does not want to sell such a valuable asset as DP World shares at current prices, there is an alternative: ICD could take on the shares, and in return advance the cash to Dubai World to meet the imminent repayment.

I have no confirmation ICD is considering such a move. The organisation plays its cards close to its chest at all times. But it would make a great deal of sense.

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