Cover Story

Dubai's Crazy Quilt of Assets


By Jonathan Keehner and Serena Saitto

Sheikh Mohammed bin Rashid Al Maktoum wanted to turn Dubai into the next London or Hong Kong, a global hub for finance and tourism. To help execute his vision, the ruler relied heavily on Dubai World, the web of state-owned companies that includes everything from DP World, which operates 49 ports across the globe, to property developer Nakheel to investment arm Istithmar World. Unlike Abu Dhabi, the wealthy emirate to the southwest, Dubai had little oil production to fuel its efforts. Instead, lenders poured more than $100 billion into Dubai, at least $34 billion of which went to Dubai World.

Now, Dubai World is at the center of the mess in the emirate. Executives at the holding company are scrambling to renegotiate $26 billion in debt, which the government said it may not back. The clock is ticking: Roughly $3.5 billion of the debt comes due on Dec. 14. "Dubai World is an example of too big to fail but also too big to guarantee," says Rachel Ziemba, a senior analyst at Roubini Global Economics, a research firm. Dubai World declined to comment.

Regardless of the outcome, Dubai World may have to temper its global ambitions. Already, advisers are assessing the portfolio to figure out what holdings can be sold to raise cash. The conglomerate likely will retain control of its infrastructure assets such as the ports, which are the emirate's crown jewels. But its global real estate and retail holdings may be auctioned off to the highest bidder. Abu Dhabi may go after some pieces in exchange for bailout money, say analysts.

"Sovereign Halo" The blurry lines between Dubai World, the corporate entity, and Dubai, the sovereign state, only make the restructuring process more unpredictable than that of a typical private company. In the end, the fate of Dubai World may be determined by the families that have governed the region for over a century, rather than investment bankers on Wall Street. "This may just come down to one sheikh calling another," says a senior adviser, who's currently working with Dubai World.

Dubai World's debt might never have hit such unsustainable levels if bankers had peeked behind the curtain. But most figured the emirate, or its neighbor Abu Dhabi, would bail out the businesses if they ran into financial trouble. The belief was so strong that both lenders and Dubai World executives referred to the "sovereign halo" around the enterprise. "Lenders weren't looking too hard into what entity was actually backing the debt," says Eckart Woertz, an economist at the Gulf Research Center in Dubai. "There was an implicit sovereign guarantee, which the government didn't discourage."

Internal documents only underscored that notion. Dealmakers that worked with creditors relied on a highly complicated, labyrinthine chart detailing Dubai World and all its related entities. "It's a bowl of spaghetti in terms of their corporate structure," says a top U.S. executive with extensive dealings in the region. "There are so many different companies and companies within companies." But the document pointed to one reassuring thing: The Dubai government owned 100% of Dubai World.

Fuzzy Financial Picture Lenders that did try to dig into the organization got a fuzzy picture. Dubai World didn't typically disclose its complete portfolio or provide financials to any of its creditors. "The banks understood that regular, fully audited reports from Dubai World were simply not available and not to be asked for," says Chris Turner, a former director of risk and asset management at Istithmar World. He estimates that Western banks gave Dubai World at least $15 billion in 2006 and 2007 without looking at the numbers. Turner, who was found guilty in absentia of embezzlement last month, maintains his innocence in the matter: "I fully intend to litigate and defend my actions in a court of good standing" outside of Dubai.

Even Dubai World didn't know exactly what it owned, according to Turner. In 2007 he started to build a list of all the real estate holdings at Istithmar World, including their current value. His team spent almost a year on the project, a task that Turner said should have taken a few months. Some loan documents and sale agreements were found in a file cabinet in an office that had been empty for months. "Being a risk officer there was like nailing jelly to a wall," he says. In a recent report on the debt restructuring published by Moody's Investors Service (MCO), the credit rating agency refers to the "limited availability of information regarding the consolidated finances and debt burdens of state-owned enterprises."

Despite the lack of transparency, Dubai World had no problem borrowing money. British financial firms, including Royal Bank of Scotland (RBS) and HSBC (HBC), arranged about $4.4 billion of the conglomerate's loans, according to a report by Bank of America Merrill Lynch (BAC). HSBC and Royal Bank of Scotland declined to comment.

Peak-of-the-Bubble Buying Dubai World used the cash to fund a flurry of purchases. But dealmakers did so at the height of the credit boom, paying a premium for their global aspirations. The company shelled out $665 million for two New York hotels, the W Union Square and the Mandarin Oriental, whose sale prices each broke a local record of $1 million per guest room, according to Real Capital Analytics. It also has a 50% stake in CityCenter, a resort and casino development on the Las Vegas Strip that's opening this month. "They defined the peak of the real estate bubble," says Dan Fasulo, managing director of Real Capital Analytics.

Now pieces of the portfolio may be sold to pay off creditors. A group of outside advisers is working with Dubai World to assess the damage and figure out the next steps. For example, AlixPartners, a New York restructuring firm, is dealing with the various businesses owned by Dubai World on potential divestitures and layoffs. "The advisers will review Dubai World's portfolio, focusing on assets where there is still equity that can be sold as well as those that are burning through cash," says Fasulo. In a statement, the conglomerate said Port & Free Zone World (the parent of DP World), Infinity World Holding, and Istithmar World would be excluded from the debt restructuring because of the units' "stable financial footing."

CityCenter, the largest-ever privately financed construction project in the U.S., may be one of the easiest assets for Dubai World to sell. The $8.5 billion project has a relatively small debt load. That could make it more appealing to prospective buyers than other assets in the conglomerate's portfolio.

Opportunists Are Circling Some properties may be wrested from Dubai World's control. Troubled loans backed by the W Union Square will be auctioned this month. The winner could use them to gain control of the luxury hotel, according to Real Capital Analytics. The Mandarin, which is suffering from the slump in travel, may not have enough money to cover debt payments, say analysts. If the hotel does fall behind, pieces of the debt may be up for grabs, too.

Already, opportunists are circling. Private equity firms, such as Los Angeles' Colony Capital and Starwood Capital in Greenwich, Conn., are checking out real estate, according to people familiar with the matter. Hedge fund Perry Capital, which owns debt backed by Barneys New York, has been approached by investors, including Toronto department store Holt Renfrew, about a takeover of the retailer.

Dubai World will have to be cautious not to unload assets too quickly in the current environment. "Any desperate fire sale would further limit the amount of cash they can raise," says Ziemba of Roubini Global Economics. Regardless, Dubai World faces some steep losses on any sales. The company paid $1 billion for Barneys in 2007. Earlier this year bankers valued the retailer at less than half that.

Abu Dhabi likely will keep close watch on the process. The emirate, which has agreed to provide as much as $15 billion in financial support to Dubai, may offer additional funds to its profligate neighbor. There may be strings attached this time. Some analysts think the capital of the United Arab Emirates may ask for equity in some assets, cherry-picking those that fit within its own regional dreams. That could include parts of the infrastructure assets, including the ports. "Abu Dhabi is standing by Dubai, but it won't be giving a blank check," says Philip Lotter, a senior vice-president at Moody's. "It has drawn a line in the sand."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkThin-Skinned SheikhEven as Dubai has tried to build an image of itself as a modern, open city, its leadership has demonstrated a low tolerance for outside criticism. Several media outlets reported that authorities in the United Arab Emirates blocked distribution of the Nov. 29 edition of Britain's Sunday Times. The paper carried a story on the Dubai crisis, along with a photo montage showing ruler Sheikh Mohammed bin Rashid Al Maktoum adrift in a sea of debt.To view the story, go to http://bx.businessweek.com/dubai-business/reference/.

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