Dubai World intervention 'carefully planned'

from Gulfnews

Government determined to ensure Dubai World's long-term commercial success, Ahmad says

By Saifur Rahman, Business Editor Published: 00:00 November 28, 2009
Palm Jumeirah developed by Dubai World. The group's debt stands at $59 billion. Nakheel's immediate debt repayment that matures on December 14 stands at $3.52 billion. Image Credit: EPA Dubai: The Dubai Government's latest intervention in restructuring Dubai World will ensure "long term commercial success" of Dubai World.

"We want to ensure resources are deployed in the full knowledge that they are used to enhance the businesses of the Dubai World Group, build on the restructuring that has already been taking place and ensure long term commercial success," Shaikh Ahmad Bin Saeed Al Maktoum, Chairman of Dubai Civil Aviation Corporation, Chairman and Chief Executive of Emirates Airline and Group and Chairman of Dubai Government's Supreme Fiscal Committee, said in a statement issued late on Thursday night.

Further information will be made available early next week, he said.

Dubai World, fully owned by Dubai Government, is one of the UAE's largest diversified holding companies that includes about 50 state-owned entities such as DP World - the world's fourth largest port operator and Nakheel - arguably the largest property developer in the UAE.

Nakheel has built the Palm Jumeirah - a palm tree-shaped iconic island, raising it from the sea through three years of land reclamation and successfully delivered it in just five years. It has raised the second of the Palm trilogy in Jebel Ali while the third was in construction when the financial crisis hit the world last year.

However, due to strong growth and massive expansion of its operations, many of Dubai World subsidiaries, especially Nakheel and Istithmar, had over-leveraged in borrowing - eventually building up a debt pile to the tune of $59 billion (Dh217 billion).

Nakheel's portfolio value at its peak exceeded $80 billion last year, lucrative enough for lenders to finance its projects without second thoughts. As a result, Nakheel continued to build neighbourhoods, generate assets for Dubai by delivering projects such as the International City, Jumeirah Lake Towers, Jumeirah Park, the Gardens, Discovery Gardens, among others.

While the going was good, analysts say, the debts were manageable, considering Dubai World's large asset base and their collective value at the market price at its peak.

However, the global financial crisis, especially the collapse of the Lehman Brothers last year, had triggered a massive cash outflow from the UAE that heavily impacted the local real estate market - the major driver of Dubai's economic growth.

Buying and selling of properties had then nearly stopped, putting pressure on prices that in turn, had triggered a collapse in property prices.

Suddenly, the $59 billion debts appeared too large for Dubai World, necessitating an internal restructuring that it had concluded in September this year.

In the meantime, while the UAE Central Government had injected Dh120 billion through the UAE Central Bank and Ministry of Finance, Dubai Government launched a $20 billion bond in February, half of which was subscribed immediately by the UAE Central Bank.

Most of the bond money has been channeled to support the government's holding companies, including Dubai World and its subsidiaries to meet their immediate debt obligations.

Following its internal restructuring, and the government's funding, Sultan Ahmad Bin Sulayem, Chairman of Dubai World, told Gulf News - "The worst for Dubai World, is over."

It now appears, it wasn't.

On Wednesday, Dubai World said, it intended to ask all providers of financing to Dubai World and Nakheel to "standstill" and extend maturities until at least 30 May 2010, that, according to reports, has triggered jitters in some financial markets.

Nakheel's immediate debt repayment stands to the tune of $3.52 billion maturing on December 14.

As a result, Dubai Government's Department of Finance on Wednesday said, it would restructure Dubai World.

"Our intervention in Dubai World was carefully planned and reflects its specific financial position. The Government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react," Shaikh Ahmed said.

"Like most global cities, Dubai has experienced its share of economic and social challenges in this global downturn. No market is immune from economic issues. This is a sensible business decision."

Concerning the global market reaction in Europe and other parts of the world, which some analysts linked to the announcement to restructure Dubai World, Shaikh Ahmed said, "We understand the concerns of the market and the creditors in particular. However we have had to intervene because of the need to take decisive action to address its particular debt burden."

He pointed out that the unprecedented growth, in Dubai and across the UAE, over the past decade has helped lay the foundation for what is now a broad-based sustainable economy beyond just natural resources.
"The economic fundamentals, such as our highly developed infrastructure, strong transport and communications hub and regional financial centre will ensure Dubai remains an attractive regional market," he added.

Analysts and industry observers say, the government's intervention could help these entities achieve a turn around, as the Government wants to take decisive action to address its particular debt burden - that could help the government to get a clearer picture of the financial situation.

"The GCC adopted timely and substantial policy responses to the global crisis, albeit at a relatively lesser magnitude due to the resilience of the region," Dr Said A Al Shaikh, National Commercial Bank's Chief Economist, said in a statement.

"No doubt, the improved economic outlook and the role of public intervention have given confidence to the financial markets and contributed to rising stock markets - especially in emerging markets - with improved economic outlets being seen in China, India and even the GCC."

Susanne Peter, Vice President Finance, IBM, said, "It is essential to integrate with business functions, not the finance-only perspective. This requires strong executive support, clear targets and measurable objectives. It's not easy."

The current economic situation has forced most large corporation to undergo a business and financial re-modelling to make them more sustainable. While these painful processes have taken a toll of companies' chief financial officer, it also made them stronger as decision-makers.

Emirates NBD's Group Chief Financial Officer, Sanjay Uppal said, the emergence of a new banking model is currently underway with customers, investors, shareholders and regulators being the main forces of change.

"Shareholders and investors are sensitive to sound governance as well as disclosures and transparency. Customers are also demanding more transparency and security of their funds," he said at a conference this week.

Uppal said that "responsible banking, learning from history, adapting quickly, strengthening balance sheets and focusing to revert to core stakeholders" were main points to consider when coming out of the downturn.