Dubai, the Gulf emirate that teetered on the brink of
default in 2009, vowed to stand behind its “strategic investments” including
those facing debt refinancing such as DIFC Investments.
The government doesn’t anticipate that DIFC Investments, a
unit of the emirate’s tax-free business financial center, or Jebel Ali Free
Zone FZE, another business park, will have trouble refinancing bonds due next
year, said Mohammed Al Shaibani, director general of Dubai ruler’s court.
“We’ll back up any strategic investment we have,” he said in
an interview in Washington. “As Dubai, I have interest to back up the
government entities and the government-related enterprises – anything that’s
sizable with a major benefit to the economy.”
The explicit government support may encourage investors to
buy Dubai debt when concerns about a global economic slowdown subside, said
John Bates, the head of fixed income at London- based Silk Invest. Islamic
bonds of Jebel Ali and DIFC Investments fell this week as investors shunned
Jebel Ali must repay AED7.5bn ($2bn) when its Sharia-compliant
debt matures in November 2012, while DIFC Investments has a $1.25bn sukuk due
in June 2012.
Dubai roiled financial markets in 2009 when Dubai World, one
of its three main state-controlled holding companies, tried to stop repayments
on about $25bn of debt, before reaching a restructuring agreement with
creditors in March.
“We take moderate confidence in the vows of support by the
Dubai government but it’s early days given global risk sentiment,” Bates said
by email. “I can see the market rebounding fast when the time is right, as
there is a lot of cash out there which will be ready to seek value.”
Dubai borrowed at least $129bn to turn itself into a
tourism, trade and financial services hub, according to Credit Suisse Group.
Policymakers are keen not to repeat past mistakes, said Al Shaibani, who is
also chief executive officer of the Investment Corp of Dubai, one of the main
state-owned holding companies.
“We learned quite a
bit in the process how to conduct our business,” he said. “We took things for
granted in the beginning. When everything is booming you kind of overlook
With about seven percent of the world’s proven oil reserves,
the United Arab Emirates has been spared the unrest that shook countries such
as Egypt, Tunisia, Libya, Syria and Bahrain.
Agreements with creditors have also helped give the emirate
and its companies “breathing space” and ruled out any “fire-sale” of its
assets, Al Shaibani said.
“We planned the process of restructuring to be between five
to eight years,” he said. “Why would I sell anything today? If we do sell
something, most likely we would be selling it closer to the five years and
Dubai, through its companies, holds stakes in entities such
as the London Stock Exchange and Nasdaq OMX Group Inc, owner of the
second-largest U.S. equity exchange. The timing isn’t right to sell those
interests, Al Shaibani said.
“Most of these companies were a private equity exercise,” he
said. “They were bought to be sold later at a certain value. We haven’t
realized the value yet. We are not obliged to sell them.”
Dubai has $31.2bn of debt coming due this year and in 2012,
according to an International Monetary Fund report published on June 16.
The cost to insure Dubai’s debt from default climbed this
week to the highest level since December. Five-year credit- default swaps rose
16 basis points, or 0.16 percentage point to 481 today, according to data provider
Dubai’s debt may continue to be hampered by concerns about
the global economy, said Sergey Dergachev, who helps manage $8.5bn of
emerging-market bonds at Union Investment Privatfonds in Frankfurt.
“Market timing now is
very unfortunate since emerging- market debt is burning down in the last two
days and the Middle East and North Africa is no exception,” he said by email
today. The “global environment is in a risk-off mood at the moment.”
Only “some smaller companies” may need to restructure their
debt, Al Shaibani said. “There are some companies that had a little bit of
exposure to the property sector and they need to clear up some issues and focus
on growth again.”
The government may not extend the same helping hand to all
companies. For Drydocks World, a company restructuring $2.2bn of debt, the
responsibility falls more on its parent, Dubai World, Al Shaibani said.
“Personally, I think Dubai World should really play a major
part in supporting Drydocks, not so much the government,” he said.