The Government of Dubai moved to take direct control of Dubai World yesterday, saying it will ask for a delay in repaying its debts as it seeks to reorganise one of the emirate's largest and most important conglomerates. The Government said its Dubai Financial Support Fund (DFSF), which is in charge of disbursing the US$10 billion (Dh36.73bn) in federal rescue funds to Dubai Government-controlled entities, had appointed its own administrator to oversee the restructuring.
"Dubai World has a portfolio of strategically important businesses and the restructuring will be designed to address financial obligations and improve business efficiency for the future," the Government said in explaining its decision. Dubai World is one of Dubai's three largest conglomerates, standing alongside Dubai Holding and the Investment Corporation of Dubai as one of the principal vehicles for implementing the emirate's development strategies.
Dubai World owns some of the emirate's most important pieces of infrastructure including its free zones. It also owns the ports operator DP World. It owns one of the largest developers, Nakheel Development, which along with two of its investment groups, Istithmar World and Limitless, was hit hard by the global financial crisis and downturn in property prices. Dubai World holds some US$60 billion (Dh220.35bn) in overall liabilities.
Investors had been expressing increasing confidence that Nakheel would be able to rely on the Government to help repay its debt, including a $3.5bn bond due on December 14. But the Government said yesterday it would ask creditors for a "standstill" that would extend maturities on Dubai World and Nakheel's debt repayments until May 30 next year. "It's a surprise in the face of all the debt raising that had been taking place," said Fahd Iqbal, the head of research at EFG-Hermes in Dubai. "Markets had increasingly been expecting a full and smooth rollover of the debt."
After borrowing $10bn from the Central Bank in February, Dubai sold $1.9bn in bonds to private investors last month and yesterday lined up $5bn in financing from two Abu Dhabi banks. The cost of insuring Dubai's sovereign debt climbed by 35 per cent to 429 basis points, according to CMA Datavision in London. Last month, Dubai World announced it had restructured its operations, cutting 12,000 jobs and consolidating its property assets in a move that would save it $800 million over three years.
The Government statement yesterday said the DFSF had appointed Aidan Birkett, a London-based managing partner in charge of corporate finance at Deloitte, the international consulting and accounting firm, as Dubai World's chief restructuring officer. Mr Birkett, a veteran bankruptcy expert, will work with Dubai World's existing management to ensure the company's operations. When Dubai established the DFSF in July, analysts said the bond sale was likely to have come with conditions. In the prospectus to its $6.5bn bond programme, Dubai said the DFSF would not necessarily bail out all government-controlled entities.
Analysts said it remained unclear what the ramifications were of the Government's decision to ask creditors for a "standstill". Ayman Khaleq, a lawyer specialising in Islamic bonds at Vinson and Elkins, said: "The issue is that it's an untested field. It can be extremely complex." But Mr Iqbal said most of Nakheel's bonds were held by local financial institutions and it was therefore likely to win approval for a delay in repayment. *additional reporting by Bradley Hope and David George-Cosh
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