Dubai(ous) – all that glitters is not gold

András Cserháti
Senior Product Manager

The tables have turned: how to destroy a financial reputation

Last week, the state-owned company Dubai World (which has debts of around USD 59 billion) shocked the international markets by asking for a six-month repayment holiday, when it told its creditors to kindly wait until 30 May 2010 before exercising their claims. As we all know, Dubai World holding is the owner of the Dubai-based Nakheel corporation, the projects of which included the property development of the “Palm Islands”. Bonds issued by Nakheel were due to mature on 14 December this year, when domestic and international investors alike had unanimously expected the company to repay the price of the securities in full.

The situation was further exacerbated by the fact that, following the announcement, the US markets closed for Thanksgiving, while in the Muslim state of Dubai the Eid al-Adha (Festival of Sacrifice) is still underway. Together with the Eid Al-Fitr that follows the month of Ramadan, Eid al-Adha is the most important religious festival in the country. This means that on this year’s 49th week the equity markets of the United Arab Emirates were only open on the last day of November and the first day of December, and were only set to reopen on 6 December. By dawn on Tuesday the story had taken another turn, as Dubai World Holding announced the rescheduling of around USD 26 billion of its debts. The rescheduling applied exclusively to the holding’s companies known as Nakheel World and Limitless World. All of this is partly reassuring, since according to the announcement the financial situation of the remaining subsidiaries, including the world’s third largest dock operator, Dubai Ports World, continues to be stable. It was also mentioned that the rescheduling would be carried out in several stages, and that the Islam bonds (or sukuks) issued by Nakheel, accounted for USD 6 billion of the debts affected by the rescheduling. These events raised serious questions with regard to the emirate’s ability – and, more importantly, its willingness – to settle in full the debts of state-owned corporations on time in the future.

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