Published: November 26, 2009
The Dubai government has asked creditors of Dubai World and its property arm Nakheel to agree a debt standstill until May 30 as it restructures the Dubai World group.
Nakheel’s US$3.52bn Islamic bond repayment was due on December 14. The Dubai government said it borrowed US$5bn from banks controlled by the government of Abu Dhabi, while Dubai’s gross debt is estimated at US$80bn.
The announcement led investors to worry about it being considered a technical default, and made the major credit rating agencies downgrade the debt ratings of a number of government related entities. Moody's immediately downgraded DP World, Dubai Electricity & Water Authority (DEWA), DIFC Investments, Jebel Ali Free Zone (JAFZ), Dubai Holding Commercial Operations Group and Emaar Properties.
Although Nakheel is not rated by Moody's, it sets a major precedent for a high-profile, seemingly strategic company facing debt repayment difficulties and thus relying on the government for support. Moody's states: "A restructuring of its obligations would indicate that the government is prepared to allow a [government related entity] to default on its obligations – a precedent that needs to be interpreted accordingly for those companies that are rated by Moody's."
Nakheel, the developer behind the city's Palm Islands has had to shed thousands of staff as local property prices halved.
The lack of transparency regarding how the emirate is to pay more than US$9bn of debt coming due in the next four months, as well as the timing of the announcement just before a national holiday in the UAE, has raised many questions. However, speaking after the news broke, Indraj Mangat, partner at the Islamic finance group of Eversheds, said: "Dubai is not going bust. It is still the shining star of the Middle East."
The supervisory board of Dubai World will have to agree to the proposed debt freeze by the end of the year.