Bloomberg News

Dubai to Prove ‘Everybody Wrong’ as Debt Repayments Loom

February 17, 2012

(Adds airport traffic in 11th paragraph.)

Feb. 16 (Bloomberg) -- Dubai, the emirate that teetered on the brink of default in 2009, expects two of its main companies to refinance $3.25 billion of debt this year without government help as economic growth accelerates.

The second-biggest member of the United Arab Emirates federation doesn’t need to raise money from international bond markets in 2012 and has “no intention” of seeking support from Abu Dhabi, Mohammed Al Shaibani, director general of the Dubai ruler’s court, said in an interview yesterday in Dubai. Abu Dhabi gave $20 billion to its neighbor in 2009 to help restructure debt.

“We have been proving everybody wrong in the last three years and this is going to be a fourth year proving everybody wrong,” he said. “This year is much better than last year in every way you look at it.”

Dubai’s default risk has dropped over the past two years as debt restructuring deals, bond repayments and profitability at companies boost confidence in its economic rebound. The benchmark stock index gained 12.5 percent this year, making it the best performer in the six-nation Gulf Cooperation Council. Dubai economy’s may expand as much as 5 percent this year after growing more than 3 percent in 2011, Sheikh Ahmed bin Saeed Al Maktoum, the head of Dubai’s Supreme Fiscal Policy Committee, said yesterday.

Repaying Debt

Dubai may “muddle” through a financing strategy this year, Bank of America Merrill Lynch said in December. DIFC Investments LLC, a unit of the emirate’s tax-free business financial center, has $1.25 billion in Islamic bonds maturing in June, while Jebel Ali Free Zone FZE, another business park, faces maturity of 7.5 billion dirhams ($2 billion) in Shariah- compliant notes in November.

“I’m very confident they will manage to sort out these issues on their own,” Al Shaibani said. “We are available for any advice, any help. But mainly they will manage it themselves.”

The emirate’s five-year credit default swaps tumbled 46 basis points this year to 399, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. They remain the fourth-highest in the Middle East.

DIFC Investment’s sukuk were at 96.62 cents on the dollar yesterday in Dubai, near the highest level since November 2007. Jebel Ali Free Zone notes were at 94.64 cents on the dollar, according to data compiled by Bloomberg. The yield on Dubai’s 5.591 percent government dollar bond due June 2021 has dropped 37 basis points, or 0.37 percentage point, this year to 5.61 percent.

‘No Default’

Dubai World, one of the emirate’s three main holding companies, roiled world markets in 2009 when it sought a delay in repaying about $25 billion of debt, accumulated as part of its plan to transform the sheikhdom into the Middle East’s business and trade hub.

The borrowing binge saw Dubai build the world’s tallest skyscraper, a man-made, residential island shaped like a palm frond, and a business park hosting offices of companies such as Goldman Sachs Group Inc. and Standard Chartered Plc.

Dubai Airports, home to the biggest Arab airline Emirates, handled a record 51 million passengers last year, an increase of 8 percent from 2010, the state-run company said Jan. 24. In December, 4.69 million travelers passed through the airport compared with 4.26 million a year earlier.

Repayment Estimates

Dubai and its state-controlled companies face about $10.3 billion in debt repayments this year, Bank of America Merrill- Lynch estimates from October show. Al Shaibani declined to give an estimate of total debt due this year.

“What people sometimes forget is that for all the noise of out Dubai, the fact is that there has been no default of a traded instrument,” Raza Agha, London-based senior economist at the Royal Bank of Scotland Plc, said by e-mail yesterday. “They didn’t default even in 2009 when the situation was worse. Even back then, they paid off the debt. Since then, Dubai’s economy has recovered well.”

Dubai Holding Commercial Operations Group LLC, a property and hospitality company owned by the emirate’s ruler, paid back a $500 million bond that matured on Feb. 1.

Drydocks World

Several companies are still seeking to restructure debt. Dubai Group LLC, an investment company also owned by the ruler, offered to pay creditors over five to 10 years as it seeks to restructure $6 billion of bank loans, a banker familiar with the proposal said Feb. 6. Drydocks World LLC, a ship-repair unit of Dubai World, said in December it may reach an agreement with creditor banks on $2.2 billion of debt in March.

The government is encouraging companies and lenders to reach agreements before seeking government help, Al Shaibani said. “They should initiate the process of refinancing and sorting out their issues and if they have any issue or difficulty or advice, or if they want support they will come back to us,” he said.

Government support doesn’t necessarily mean offering debt guarantees, he said. He listed the Dubai Support Fund, set up in 2009 with the help of Abu Dhabi’s money, as one potential avenue of assistance “under certain conditions, of course.”

Some creditors “thought they just go straight to the government and expect the government to write a check,” he said, giving the example of Drydocks. “It doesn’t work this way. They have to go through the process, and they have to respect corporate governance.”

Monarch Alternative Capital LP, a New York-based investment company, filed a claim of about $45.5 million in a London court in October against Drydocks. The company is relying on its operations in Dubai to make up for the “challenge” posed by its investments in the Far East, Al Shaibani said.

“In reality the main money generator is Dubai, and Dubai is doing really well,” he said. “They are very busy, almost 100 percent occupancy. They have a huge business in the pipeline.”

--With assistance from Arif Sharif in Dubai. Editors: Shaji Mathew, Riad Hamade

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Maher Chmaytelli in Dubai at mchmaytelli@bloomberg.net

To contact the editors responsible for this story: Riad Hamade at rhamade@bloomberg.net; Claudia Maedler at cmaedler@bloomberg.net


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