Thursday, November 26, 2009

Shock at Dubai World announcement

The business world was expecting Nakheel to redeem its Islamic bond when it matures in two weeks.

Recent comments from Dubai government VIPs reinforced the expectation that debts would be paid on time.

So there's alarm in markets around the world since Dubai World briefly announced that it was asking creditors to defer payment for at least six months.

What a disastrous blow for Brand Dubai.

The bond has enormous significance because it's both the world's largest Islamic financial instrument and is considered the ultimate litmus test for Dubai's ability to meet its commitments.

Equally bad, the announcement was made after close of business on the eve of the Eid holiday, so now no-one's available for comment or clarification. That fact hasn't been missed by commentators either.

Badly, badly handled all round.

Commentators around the world are talking about it in disapproving terms and there's the question of whether this will be considered a default, with enormous implications for not only Dubai but Islamic bonds in general.

The New York Times says that the move demostrates that Abu Dhabi won't unconditionally bail out Dubai government controlled companies but that there has to be a genuine restructuring of the debt with the pain being equally shared by Dubai and its banks.

The Wall Street Journal talks about bankers and executives being stunned by the announcement, and says 'Dubai's efforts to deal with its mountain of debt estimated to exceed $80 billion were dealt a hammer blow.'

The Times, once one of the world's great newspapers but now reduced to near-tabloid level since being bought by Rupert Murdoch, predictably goes with the cliche 'Dubai World and properties built on sand.'

The UK Daily Telegraph headlines its report 'Dubai recovery hopes hit by debt 'standstill' call' and says that 'the credit-crunched Gulf playground, has shattered hopes of imminent financial recovery.'

The Financial Times has the widest coverage and talks about markets reeling at the announcement and acting with alarm at fears of default. Comments from analysts confirm the reaction.

There's only one positive side to the announcement and predictably the local media puts that spin on it, that Dubai World is to be re-restructured and an outside world-renowned expert is being brought in as Chief Restructuring Officer. Gulf News print edition headline, for example, says 'Dubai World gets a breather'.

The trouble is that it's the right move but it's taken far too long for the move to be made.

For nearly a year the Dubai World companies have been going through a 'restructuring'. But it's always a nonsense for the management responsible for a company's troubles to be allowed to create and preside over a restructuring made necessary because of their own policies. A Chief Restructuring Officer, an outside expert with a proven track record, was needed from the beginning of the crisis to sort the mess out. But it wasn't treated with the urgency the situation demanded.

They became bloated companies with unnecessarily huge numbers of people being paid huge amounts of money, huge duplication of job functions between the companies in the group, unnecessary competition to build the biggest, tallest.

That led to too many mega-projects all going ahead at the same time. Worse, many were pushing engineering into uncharted waters but second and third versions were being pushed ahead before the engineers had worked out how to make the first one. The Palm Islands/The World are a classic example.

Heads, senior heads that is, should have rolled long ago.

Thankfully the financial crisis put a stop to the nonsense and has forced the companies to come down to earth. Restructuring was inevitable and long overdue. It is happening but it's all taken far too long.

We're a year into the crisis before the real moves are made that needed to be made there and then.

(The Tamweel/Amlak merger is another example. The property market is desperate for mortgage providers but the two largest have been in limbo for over a year without a policy decision being made to get them back into business. And we've been told that it won't happen until next year.)

To my mind this is the biggest blow to Brand Dubai that I can recall. The one that will do the most damage to Dubai's reputation as a good, safe place to do business, as a place that understands what business is all about and knows how to conduct it.

We'll undoubtedly be seeing more of the 'Dubai collapsing, reclaimed by the desert' stories from certain commentators as a result of this announcement.

Ignore them, Dubai will survive as the commercial centre that it's been for nearly two hundred years.

But this is a huge setback.

You can read some of the comments about it here:

NYT. Dubai Fund Asks for Stay on Debt Payments.

WSJ. Dubai Debt Woes Turn Ugly After It Seeks Standstill Deal

The Times. Dubai World and properties built on sand.

Daily Telegraph. Dubai recovery hopes hit by debt 'standstill' call.

FT. Dubai shock after debt standstill call which also has links to related articles.


James O'Hearn said...

Sorry, Seabee, but I think you got your papers mixed up.

Murdoch bought the Journal, not the Times.

Julie said...

James, I think you're wrong there. The Times (the UK one, not the New York Times) is owned by News Corp.

Anonymous said...

and predictably the local media puts that spin on it,

Not as predictable as the western media putting the most negative spin on it.

Abu Dhabi isnt and shouldnt bail Dubai out whenever and for whatever. Abu Dhabi now expects at very least effort from Dubai. Not alot to ask.

James O'Hearn said...

Yup, Julie, you're right. Two paragraphs up, the NYT was mentioned, and I just didn't make the connect. It just goes to show how North American I am, that "The Times" is not only not a paper of note in my mind, but if you said "I saw it in the Times,"... I'd need you to add "...of London," so I'd figure out what you were referencing.

Anonymous said...

The Dubai cheerleaders are pretending all is well, and are saying how Dubai's debt is miniscule compared to the USA's debt. In other words, everything is fine.

Anonymous said...

Khaleej Times headline tomorrow: "Dubai destined for success". Arab News headline tomorrow: "Dubai weathers economic downturn by sailing against the current".

Gulf Daily News: "Bahrain outlook better than Dubai, investors told".

Anonymous said...

So will the rulers of Dubai be imprisoning themselves, lopping off hands, or confining the family to the emirate, as they have done to countless lesser mortals who default on their debts, or can't repay them after being sacked?

Seabee said...

ABIT apart from The Times piece I wouldn't say the overseas media has put a negative spin on the story.

The facts of the story itself are hugely negative for Dubai. Bond and stock markets all over the world are down as a result of the fallout and the general comment is 'as a result of Dubai's announcement'.

For example I'm currently listening to ABC Radio from Sydney and that's the lead business story.

The ABC website business section leads with: Dubai debt doubts come out of the blue.
The world's share markets are being shaken today by big debts held by the gulf state of Dubai.

It really is the big, and bad, news around the world.

I agree with your last para, Dubai needs to sort out the problem and as I said in the post really should have done right at the beginning. They've been fiddling around the edges not doing the job properly and I think the suggestion that AD has refused to keep simply handing over money is right.

Matt said...

"So will the rulers of Dubai be imprisoning themselves, lopping off hands, or confining the family to the emirate, as they have done to countless lesser mortals who default on their debts, or can't repay them after being sacked?"

--Good point. When's Sheikh Mohammed going to prison?

Anonymous said...

All of you living in Dubai were warned, didn't you?! The worst is yet to come, in the next 5 years almost everything in Dubai will be owned by Abu Dhabi's elder bros.

nzm said...

Well, they may not be imprisoning themselves or cutting off hands, but certainly, if this report is correct, the guilty are having their about-town images replaced.

And other heads are rolling!

Anonymous said...

This is almost nothing. NOT nothing. But it isnt a huge deal. Not internationally anyways. Poeple look for shit.

This DOES make people ask what people in Abu Dhabi have been asking for a while. What the fuck are they doing in Dubai?

That I agree on. In October the central bank actually said they would NOT guarantee Dubai's debts. Which is unheard of in the UAE.

Abu Dhabi has been paying blank checks for a while now. But in the end, we are, SADLY, one country, and so a "sort" of bail out will happen. It will.

Politically however, Dubai has been warned in a few ways. And finally, i am glad that Abu Dhabi has let this happen.

So yes, this isnt all is well, but it isnt anywhere near as what people have been making it out to be. No where near.

As for markets being down... markets are controlled by people and what they think. Not on reality. You should know that.

Also read this:

Seabee said...

ABIT, we disagree quite often but I agree with all you said here - except for one point.

"But it isnt a huge deal. Not internationally anyways."

You're right that it isn't a huge deal relatively - compare the debt with even private companies like Lehman Bros, General Motors, not to mention a country such as Iceland. The amount involved is relatively miniscule.

But the effect worldwide has been huge and continues to be. It is a big deal internationally.

nzm said...

It is a big deal in terms of those international banks who are holding onto promissory notes for repayment from Dubai companies who have taken out loans.

These banks will be wanting to cut their losses and onsell these notes as quickly as they can in order to avoid not getting any returns.

Sure, Abu Dhabi will be snapping up as many as they can, but what about the other big fish out there that would like a piece of Dubai for whatever reason - Saudi Arabia, Israel, perhaps China, even the US? The banks won't be choosy - whoever comes up with the most money will get the credit notes to hang over Dubai's head.

Anonymous said...

Dubai is a sewage pit - the elite will now reap what they have sown.
Perhaps this is what Tiger was upset about:
He just found out he lost a whole lot on Thanksgiving day.

Anonymous said...

I do agree that the news is extremely bad for Dubai. But if one thing has been proven, is that it is resilient and has been such since a long time. Shk. Rashid's vision of creating Dubai as a trading hub should have been carried out, rather than the glitz and glamour of real estate. The truth is that if Dubai was a trading hub, primarily, it would have weathered all the economic crisis very well and would be standing tall.

But a lot remains to be seen now, and I honestly believe that this is a wakeup call for the rulers and the people who run businesses here. It's the law of the jungle, they need to step up and show that they are fit enough to survive the coming storm

Anonymous said...


Anonymous said...

my word is my bond does not apply to DUBAI ?