Written by Ahmed M.I. Egal

There has been much written about the announcement by Dubai World (DW) on Thursday 26 November requesting a six-month freeze on debt repayments from its creditors. This statement set-off a deluge of bad press that quickly translated into an abrupt decline in major bourses around the world on Friday as investors, already jittery about the strength of the global economic recovery after the financial meltdown of late 2008/early 2009, marked down global equities, particularly those of banks and financial institutions thought to have substantial exposure to Dubai. By Monday 30th November however, the international markets had returned to their senses and recouped much of what they had shed in Friday’s knee-jerk reaction to DW’s surprise announcement, although regional bourses, particularly Dubai and Abu Dhabi, continued to fall. Much has been made of the statement on Monday by Dubai’s Finance Dep’t. that while DW is principally owned by the Dubai Government, it is a commercial company and that the Dubai Government has not guaranteed its borrowings.

The Disingenuousness of the Bankers & the Tame Financial Press

The gnashing of teeth by bankers and financial pundits and their solemn protestations of ‘implied’ or ‘understood’ sovereign ‘support’ for DW’s obligations are not only laughable nonsense, but hark back to the arrogance of the Wall Street bankers who were at a loss to understand why ordinary people were so angry and disgusted at their obscene bonuses, even as they held out their hands for tax-payer funded subventions to rescue their banks. The hard questions that need to be answered with respect to DW’s current liquidity problems are:

§         Why is there ‘surprise’ and hand-wringing by bankers that DW debt will not be assumed by the Dubai Government when no sovereign guarantee was required when the debt was extended? Why was sovereign backing ‘assumed’ if it was not explicitly part of the credit package of the extended debt? In short, why are the banks and pundits raising the matter of sovereign support when they clearly know, and knew, that such support was never part of the credit packages they negotiated?

§         Why is the level of debt of DW and other Dubai corporate entities such a ‘surprise’ to the financial community, when the high and growing level of debt of Dubai and its flagship companies has been an open ‘secret’ in regional financial circles for well over a decade, i.e. since the mid-1990s? After all, DW and its affiliates (e.g. Nakheel, Emirates and DP World) have not been borrowing on the quiet from some obscure money-lender in the dead of night; rather they have been securing debt from the most prime of international lenders which are household names throughout the world. Where were the financial ratings agencies that are supposed to track such deals and trends and rate the risk of such debt impartially? Have they and their banking abettors learnt nothing from the global financial meltdown of a mere year ago?

§         The vulnerability of DW’s financial model in the face of a slowdown in the global and regional economy has been painfully self-evident to anyone with a more than a passing knowledge of the Gulf Region for at least a decade and probably more. Thus, we are forced to ask why the financial wizards that happily pumped up Dubai’s real estate bubble did not see the writing on the wall, at least since the fourth quarter of 2008, when it was clear that the global economy was in for a recession lasting at least a year, and most likely longer. Perhaps, they were happily awaiting another bailout as can be evidenced by their claptrap of ‘implicit’ sovereign backing for DW liabilities, and the gnashing of teeth and bad press of the pliant financial media seeking to paint Dubai as the ‘ogre’ in the fairy tale narrative of imminent collapse we have witnessed recently.

§         The prospect of Abu Dhabi riding to the ‘rescue’ of Dubai which has been floated by bankers and financial pundits is nothing more than a transparent ploy to secure a bailout for the banks, thereby shielding them from the consequences of their lending decisions. What these pundits fail to point out is that there is no reason whatsoever for the Abu Dhabi or the Dubai governments to bailout the banks.

The Facts of Dubai’s Position

The fact of the matter is that the finances of the Dubai government are not affected by DW’s present liquidity crunch, and there is no immediate prospect of a sovereign default. The US$ 10bn bond issue, largely taken up by Abu Dhabi, earlier this year and the second tranche of another US$ 10bn scheduled for early next year have gone, and will go, a long way to shore up the cash position of the Dubai government. Dubai is one of the best run governments in the Gulf region with an enviable record of efficiency and professionalism, for example it leads the region in harnessing information technology to enhance efficiency through an e-government initiative dating back to the early/mid 1990s. Having said that, it is surprising that one of its flagship corporates finds itself in the mess that DW currently does, and this raises important questions that need to be answered:

§         In the wake of the global financial crisis at the end of last year, why didn’t DW institute a proactive debt management/reduction programme from the end of 2008? Surely, the management must have seen that the real estate business, like Nakheel, would suffer from the global economic recession as sales of their properties dried up and values fell.

§         Why did DW management run up and maintain such a high level of debt during the boom times when there was ample opportunity to replace some of this debt with equity when the regional stock markets were snapping up new issues like hungry carnivores? In fairness, the low cost of debt during the high liquidity/low interest Greenspan era since the mid-1990s was very seductive, and DW is not the only company that was seduced by cheap, easy credit.

§         Why did DW management wait until the eleventh hour to seek the stand-still? This delay is made even more unforgiveable by the fact that the major impending maturities are for Sukuk issues, which are difficult to restructure since they are Sharia-compliant instruments in which the profit due to the holders are locked in to specific maturity dates. By waiting for as long as they have, DW have compromised the ability of the managers of the issues to structure, negotiate and complete a restructuring of these bonds that not only addresses the requirements of issuer and bondholders, but that also meets the requirements of Sharia. DW, like the bankers, had ample time to work out an acceptable solution to its liquidity crisis but, again like the bankers, chose not to address the problem until it practically exploded in its face.

§         It is also clear that DW’s announcement of the standstill was not handled well either with respect to timing or to coordination with the federal or Dubai financial authorities. Such a market-sensitive announcement needs to be handled with delicacy and is usually supported by an effective and pre-planned investor relations effort aimed at minimizing negative publicity through the rapid dissemination of restructuring and debt-management plans. This did not happen, and the silence of DW management during the Eid Al-Adha holidays and subsequent UAE National Day celebrations provided a window for all kinds of rumors to swirl and feed on themselves.

Conclusions

Clearly, neither the management of DW nor its bankers have acquitted themselves well in this episode in Dubai and the UAE’s dizzying recent history of growth and development. The lack of sober, credit judgment in the extension of credit is not unique to DW’s bankers, and must be seen in the context of the wider profligacy of the global financial community in converting the business of banking into a high-stakes casino in which huge bets are made on opaque and arcane instruments which are unfathomable not only to ordinary people, but often to the bankers themselves. What is cheap, and somewhat sickening, is the outcry from bankers, financial pundits and their cheerleaders in the financial media, seeking to pressure Dubai and Abu Dhabi into assuming the debt of DW and thus provide them with yet another bailout. These governments are right to send these charlatans packing and force them to face the consequences of their own decisions.

Many bankers and financial pundits will retort that this will result in a downgrading of ratings not only for Dubai, but also throughout the region. This is arrant nonsense since the economic outlook for the region is not determined by the current liquidity difficulties of one company in Dubai. Indeed, Dubai’s own economic outlook is only marginally affected by DW’s current liquidity problems. Dubai has carved out a glittering and vibrant metropolis out of the desert, and transformed a minor, imperial trading post into the Hong Kong of the Middle East in the space of three short decades. Irrespective of the gloomy prognostications of the naysayers, its future is secure and bright as the meeting place where Asia and Africa come to trade and conduct business. The important point here is that the restructuring of debt is not something that is either new or unique to DW; indeed it is a common occurrence among companies around the globe during the present recession. It is also pertinent to remember that the liquidity crunch affects DW’s real estate business, and does not affect its other companies, e.g. DP World, which continues to be profitable and financially stable.

Finally, it is important to point out that this crisis might result in a positive outcome if businesses, project sponsors and financiers emerge from it with a desire to explore financing paradigms other than the interest-centric, Western model. Perhaps, it is now time to embrace in a more substantive way, the Islamic financing model, where fund-users and fund-providers enter into a collaborative relationship wherein they share risk and reward. But then, this would require bankers who are truly entrepreneurial and evaluate projects and businesses as true stakeholders with no thought of bailouts.

This article was originally published in The Media Line on December 3, 2009

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