Last month, Dubai Government announced a long-awaited restructuring proposal for Dubai WorldDubai World’s
$23.5bn debt. In a move widely welcomed by local and international markets, the Government will
inject $9.5bn into Dubai WorldDubai World, out of which its property development subsidiary NakheelNakheel will
receive $8bn.
The capital injection will facilitate Dubai WorldDubai World’s restructuring of its activities with a new business
plan that will enable it to repay the remaining $14bn in debt over an extended period of five to eight
years.
The proposal effectively removes the cloud of uncertainty that has been hanging over local and
regional financial markets since November 2008 and significantly restores investor confidence in
Dubai. The restructuring proposal will reduce the risk premium that investors have been demanding
from regional borrowers. Encouragingly, following the announcement, Dubai’s credit default swap
(CDS) dropped to its lowest level in four months.
A main message emerging from the restructuring proposal is that the Government has treated both
foreign and local creditors equitably and fairly, without discrimination, a clear refutation of some
misinformation. The negotiated proposal took into account the interests of all stakeholders. For
creditor banks the proposal offers a highly manageable solution, as the restructuring proposal does
not entail any ‘haircuts’ on the value of debt, which would have led to provisioning? dreaded by
banks.
Transparency and clarity of ownership had been one of the biggest concerns raised since the
proposed debt standstill. The conversion by Dubai Government of $8.9bn of debt and claims ?
representing 38% of the total amount of standalone debt and guarantees of Dubai WorldDubai World ? into
equity, effectively answers questions on ownership.
Significantly, it was the government of Dubai that absorbed the burden of the debt?equity
conversion, and not the private sector, unlike the case with many recent restructurings around the
world. The move clearly demonstrates Dubai’s commitment to supporting the success of its stateowned
companies, a mainstay of its economic development strategy.
The debt?equity conversion gives Dubai WorldDubai World and NakheelNakheel a stronger equity base and sound
financial footings that allows them to proceed with organisational (initiated with the set?up of a new
NakheelNakheel Board) and operational restructuring.
One of the more important lessons from this episode is the need to avoid maturity mismatches
arising from long gestation projects (such as the Palm) being financed with short?term money and
subsequently facing rollover risk and the need for strengthened corporate governance, better
financial controls and risk management.
The news and implementation of the DWDW financial restructuring will have a positive impact on the
outlook for the broader UAE and GCC economy, due to the reduction of investor uncertainty and
overall macro?economic risk. Improved economic prospects, along with the fact that creditors were
not subject to ‘haircuts’ means that banks will not have to take as many provisions on their balance
sheets as previously expected. As a result they will have greater ability to lend. Reduced uncertainty
will lead to greater credit growth, which will stimulate economic recovery and expansion.
Viewed from a national perspective, the restructuring proposal, has once again demonstrated the
strength of the UAE’s Federal fabric, a refutation of the politically motivated doubting voices. Abu
Dhabi’s support for Dubai’s public debt programme has reinforced national unity and shown the
Federation’s collective determination to withstand the challenges brought about by the
international financial crisis and its efforts to promote more stable and balanced growth.
We are witnessing a confirmation of and moving towards greater federalism. The restructuring
proposal will inspire more confidence in Dubai’s and UAE’s ability to deal with the challenges
brought by the global economic crisis
Nevertheless, there are lessons from the DWDW episode to be learned for Dubai and the countries of
the region. Dubai WorldDubai World’s debt crisis has highlighted critical gaps in the UAE’s legal and regulatory
infrastructure. The GCC, Middle East & North Africa region countries lack modern insolvency
framework that can facilitate the restructuring and reorganisation of companies and adequately
protect creditors’ rights. Modernisation and reform of the region’s insolvency framework should
now be addressed as a policy priority.
The crisis has highlighted the urgent need to invest in the development of local currency money &
debt markets which can provide an alternative source of financing for development needs. Active
and liquid local currency debt markets can help in ensuring more stable access to capital by local and
regional companies and governments. Debt markets can provide infrastructure and development
projects, like those of Dubai WorldDubai World’s, more appropriate for longer?dated types of financing than
banks.
In the same vein, the positive action by the Dubai Government needs to be followed up with an
open communication policy based on strengthened corporate governance practices and increased
transparency and disclosure for State Owned and Government Related Enterprises.
Looking back at the last four months, the reaction caused by Dubai WorldDubai World’s debt restructuring
announcement is best described as a “storm in a tea cup.” The facts are that the UAE, the GCC and
the MENA region countries with access to international capital markets have never defaulted on
their debts and obligations and have much stronger economic fundamentals than those of so?called
‘advanced countries’ which were addressing criticism and ‘advice’.
So why the doubts and invidious questioning? One concludes that much of the media hype is
politically motivated. Dubai’s Arab economic success story as a multi?cultural, multi?ethnic and
multi?religious hub and melting pot is clearly not to the liking of some countries with different geostrategic
ambitions and outlooks and of some of the countries that were actively promoting the
interests of their own companies against those of Dubai and DWDW.