Raymond Barrett

Sunday Business Post
By Raymond Barrett

Creditors of Dubai World are assessing their options in light of the announcement that the state-owned company is suspending repayments on debts of someUS$60 billion.

British banks such as HSBC, RBS and Lloyds, along with the US hedge fund QVT, have considerable exposure to Dubai’s flagship holding company – the force behind the still incomplete ‘mega-projects’, such as The World and the Palm artificial islands.

Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, sought to shore up shaky investor confidence last week, claiming that the media had exaggerated the scale of the crisis.

‘‘We in the Emirates, and in Dubai in particular, are strong and tenacious and we have the determination and strength of will to confront all challenges. It is the fruit-bearing tree that becomes the target of [stone-]throwers,” he said.

But this unexpected round of debt restructuring has raised serious questions about the solvency and the corporate structure of ‘Dubai Inc’ – the sobriquet earned by the free-wheeling Gulf emirate as it pursued a path of highly-leveraged expansion over the last decade.

Without the oil reserves of neighbouring Abu Dhabi, Dubai’s ruling Maktoum family followed an aggressive acquisition policy that was financed by large borrowing.

The government of Dubai – one of seven semi-autonomous emirates that make up the United Arab Emirates – now oversees an intricate web of seemingly ‘private’ entities across the globe, through a number of holding companies.

Dubai World is now heavily involved in maritime operations, transport and logistics, financial services and – most critically – property development and construction, while its flagship Emirates Airlines is run by the Investment Corporation of Dubai.

Sheikh Mohammed’s personal fortune (estimated at around $16 billion) is controlled by another entity, Dubai Holding.

While these companies look and act like ‘private sector’ organisations, it is not uncommon for their chairmen to double up as de facto government ministers.

For example, the chairman of Dubai World, Sultan bin Sulayem, has also served on the emirate’s executive council.

Despite the Byzantine structures at play, Dubai engenders a certain degree of confidence among the global financial community, otherwise it would never have received such large lines of credit in the first place.

In 2009, Transparency International ranked the UAE 30th in its annual corruption index, considerably higher (ie, less corrupt) than its regional neighbours Iran and Iraq, who were placed 168th and 176th respectively. However, this is not the first time Dubai World has courted controversy.

In 2006, a planned takeover of ports in the US fell apart amid security concerns in Washington.

The company found itself in the middle of a ‘public versus private’ debate last year when the European Union proposed to regulate the activities of sovereign wealth funds. European lawmakers were concerned that entities such as Dubai World were political as well as financial vehicles, and so needed greater oversight.

While the government of Dubai can leech funds from the various conglomerates it owns, the powers that be seem less inclined to embrace their debts.

Last week, the UAE’s economy minister Sultan bin Saeed al-Mansouri dropped a big hint that there would be no state bailout of the stricken company.

‘‘Dubai World’s debts do not affect the economic performance of Dubai or the UAE, and it is a matter of time before the company restructures its debts and honours its commitments as per a scheduled plan,” he said.

Dubai World’s creditors clearly do not share the same sense of optimism, and will doubtless be eyeing up any ‘jewels in the crown’ that could be sold off if the restructuring plan fails.

In a worst-case scenario, the Maktoum ruling family maybe prepared to let the foreign banks which backed Dubai World with massive loans lose out, for they will undoubtedly have ring-fenced as many of their prized assets as possible.

But these anxious creditors still face one unavoidable problem: the property, leisure and financial holdings that underpin much of this $60 billion debt are now worth drastically less than when these loans were issued, even if buyers can be found.

Now, where have we heard that before?