Markets rise after Dubai debt relief plan unveiled

Dubai World will use $10bn cash injection from Abu Dhabi to repay $3.5bn Islamic bond, as well as for loan payments, working capital and settling contractors' bills

Investors' view of Dubai is now more settled after the recent financial storms

The Abu Dhabi Government's relief package of US$10 billion (Dh36.7bn) for Dubai World injected confidence yesterday into stock markets, sending local shares soaring and moving stocks upwards from Hong Kong to New York.

Indexes across Asia posted gains, while the UK's FTSE 100 was up by 1 per cent at the close of trading. HSBC and Standard Chartered, a pair of British banks estimated to be owed more than $1bn each by Dubai World, rose by 2.4 per cent and 4.3 per cent respectively in London. Shares in Samsung, the principal contractor on the Burj Dubai, the world's tallest skyscraper, rose 2.2 per cent after the announcement.

"Dubai is, and will continue to be, a strong and vibrant global financial centre. Our best days are yet to come," said Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Dubai Supreme Fiscal Committee, when announcing the cash injection. The euro and sterling also strengthened against the dollar on perceptions of a reduced risk of losses at European banks exposed to Dubai World. European banks are estimated to be owed around $40bn by Dubai-based firms.

The Dubai Financial Market rose by 10.4 per cent, while Abu Dhabi's finished up 7.7 per cent. Both indexes are close to recovering the ground they lost after Dubai World announced a debt standstill on the eve of Eid al Adha. "Abu Dhabi is providing a backstop," said Amir Sadir, the head of global wealth management for the Middle East at Merrill Lynch. "There will also be more protection for creditors and more transparency - everything that institutional investors have been looking for."

Dubai World, the emirate's largest government-owned conglomerate, rattled markets last month when it announced it would seek an agreement with creditors to delay payments on $26bn in debt until at least next May, as part of a restructuring effort. In contrast the mood yesterday was bullish, as investors, bankers and analysts hailed the relief package as a boon for markets and the strongest sign to date that Abu Dhabi was ready to extend financial support to its neighbour.

David Wyss, the chief economist at Standard & Poor's in New York, said: "The Abu Dhabi decision reduces the risk of a major default in the UAE region and sends exactly the right message to world markets." While Dubai World controls a wide range of companies, including the ports operator DP World and an investment firm that owns the luxury retailer Barneys New York, the debt troubles at the company originated at its biggest property firm, Nakheel.

Nakheel had borrowed heavily to finance some of Dubai's most ambitious projects, including the three palm-shaped islands and the World, a patch of man-made islands in the shape of a world map. The financial crisis battered property values in Dubai, leaving Nakheel virtually bereft of revenues at a time when many of its large debts were coming due. Sheikh Ahmed said: ""Like other global financial centres, Dubai has faced recent market challenges driven by the global economic slowdown and a severe real estate market correction."

Earlier this year, the Dubai Government set up the Dubai Financial Support Fund (DFSF) to help its ailing state-controlled companies. The aim, officials at the fund said, was to give loans on commercial terms to struggling firms that had bright long-term prospects. The fund was seeded with a $10bn bond entirely subscribed by the Central Bank. A further $5bn in financing was lined up last month from two Abu Dhabi government-owned banks, Al Hilal and National Bank of Abu Dhabi.

The new $10bn will be used to repay a $3.5bn Islamic bond issued by Nakheel that fell due yesterday. Nakheel must pay investors about $4.1bn to settle the sukuk, including deferred profits and other payments. After the sukuk is repaid, the remainder is to be used by Dubai World to make interest payments on outstanding loans and bonds and as "working capital" to fund everyday operations. The rest will go towards making good on trade finance agreements and paying contractors.

Some foreign contractors doing business with Dubai World have complained that they have not been paid in full for their services. Dubai World is still seeking a standstill agreement with creditors, and assistance from the DFSF until next April 30 is contingent on it securing such an agreement and embarking on a restructuring. Sultan bin Saeed al Mansouri, the Minister of Economy, said at a press conference yesterday: "They are actually paying for what they have to, they are honouring that"

Fitch Ratings and Standard & Poor's, the international credit ratings firms, said late yesterday that the $10bn was not likely to change their assessments of Dubai-based firms. [e-mail] * With additional reporting by Uta Harnischfeger, Matthew Chung and, in New York, James Doran