Insight: Deserted debts stir disquiet in the mysterious world of Dubai Inc
09/02/2021 12:00
(Repeats with no changes to text)
By Davide Barbuscia
DUBAI, Feb 9 (Reuters) - Dubai's debts have always been
something of a mystery for investors but since the coronavirus
pandemic hit its economy, things have got hazier, some say.
Over the past 12 months, two firms with links to Dubai’s
government and its ruler, respectively, have said they would not
meet hundreds of millions of dollars' worth of debt repayments,
a rare step in the Middle Eastern business hub, where debts are
typically renegotiated and state support is often seen as
implicit.
One of the firms, Dubai Holding, the investment vehicle of
Sheikh Mohammed bin Rashid al-Maktoum, Dubai's ruler, told
creditors that it would not service a $1.2 billion loan owed by
its subsidiary Dubai Holding Investments Group and was prepared
to pursue liquidation for the unit, according to a source and a
document sent to investors in December and reviewed by Reuters.
The second firm, state-owned property developer Limitless,
told creditors last March it wasn't able to meet payments for a
loan worth about $1.2 billion, according to a company document
seen by Reuters. It has since been seeking to restructure the
debt. urn:newsml:reuters.com:*:nL8N2BM0H9
Dubai Holding, which has $35 billion in assets and holdings
in property and the hospitality sector, declined to comment on
the debts of its subsidiary and repayment plans for other units.
A Limitless spokeswoman told Reuters its restructuring
discussions with lenders were continuing but did not comment
further. Creditors to the company included Dubai banks such as
Emirates NBD, Mashreqbank and Dubai Islamic Bank. They declined
to comment.
The moves by Dubai Holding and Limitless have weakened the
assumption that state support is a given, investors say,
prompting some creditors to reassess their appetite for and
exposure to Dubai-linked debt.
With tens of billions of dollars worth due for repayment
over the next few years, some lenders are selling their
exposures or making provisions for future losses, three banking
sources told Reuters.
The price of Limitless debt has fallen sharply in the
secondary market, according to price sheets reviewed by Reuters.
The price of Islamic bonds issued by property firm Meraas, which
was incorporated into Dubai Holding last year, has fallen
steadily this year, according to Refinitiv data.
Dependent on trade and tourism, Dubai's economy has buckled
under the strain of the pandemic and low oil prices. Forking out
to support so-called government-related entities (GREs) would be
a further strain on the public purse.
"The recent defaults have highlighted long-standing concerns
about high public and private sector leverage against a backdrop
of low growth and a very weak real estate market characterized
by chronic over-capacity," said Cedric Berry, a Fitch analyst.
"In itself, a policy of more limited support is positive for
the government’s finances and creditworthiness. However, there
is limited transparency on the GREs’ balance sheets and the
challenging economic environment has increased the risk that
some entities could still require financial support, putting
pressure on government finances."
The Dubai media office did not respond to Reuters queries on
Dubai's indebtedness, Dubai Holding's exposures or the city
state's plans to tackle the liabilities of state entities.
The United Arab Emirates Central Bank, asked whether it was
encouraging banks to make provisions for outstanding Dubai debt,
declined to comment.
"A TOUGH LINE TO DRAW"
In the case of Limitless and of Dubai Holding Investments
Group, neither the state nor Dubai Holding had any contractual
obligation to pay creditors.
Dubai Holding was only responsible for interest payments on
the $1.2 billion loan and at its maturity it told creditors that
it was "prepared to pursue an insolvent liquidation in the
absence of any feasible alternative," a document sent to
investors in December showed.
Dubai’s government explained its approach to GREs in the
prospectus for a rare public sale of sovereign debt last year.
The sheikhdom said that if such companies were unable to fulfil
their debt obligations, the government may, "at its sole
discretion, decide to extend such support as it may deem
suitable."
But some investors have been working off the basis that
there was an implicit government guarantee, two bankers said, a
sentiment reinforced by Dubai's support for Emirates Group, the
state-owned airline, during the coronavirus crisis.
The flag carrier was given a $2 billion equity injection by
the state last year. An Emirates spokeswoman told Reuters that
none of its debt has a guarantee by the government or by the
Investment Corporation of Dubai, its sovereign wealth fund.
Investor confusion has been compounded by the fragmentation
of Dubai's debt. Some sits under the government, some under its
sovereign wealth fund, and some under the umbrella of Dubai
Holding, the investment vehicle of Dubai's ruler - a major force
in developing the local economy.
"It comes back to the same old argument, which is where does
the ruler in his private capacity stop and the obligations of
the emirate start. When you talk about an absolute monarchy,
it’s a tough line to draw," a banker at a Dubai lender said.
Some of the debts owed by Limitless, the property developer,
were trading at 20 cents on the dollar in December, down from 30
cents a few months earlier, according to secondary loan trading
price sheets reviewed by Reuters.
Banks' provisions for bad and doubtful debts in the United
Arab Emirates amounted to nearly $42 billion as of November last
year, up from $36 billion at the end of 2019, according to
central bank data.
Non-performing loans are expected to account for 7.6% of
total loans in 2020, up from 6.5% a year earlier, the Institute
of International Finance has estimated.
ABU DHABI
A dearth of statistics makes it difficult to get a full
picture of Dubai’s financial situation. Its sovereign bonds are
not rated by credit rating agencies and the city state has
mostly used private placements and bilateral loans to raise
capital.
The government said in August that its debt levels were
equivalent to around 28% of 2019 gross domestic product, but
that figure goes up to over 100% of GDP, according to estimates
by research firms and ratings agencies, if debt raised by GREs
is also taken into consideration.
In its bond prospectus last year, Dubai's government said it
had no official estimate for GRE debt.
London Based Capital Economics has estimated that before the
end of 2024 $38 billion of Dubai GRE debt is due for repayment,
much of it in 2023.
Many of the debts date from the 2008-09 financial crisis.
Back then, oil-rich Abu Dhabi gave Dubai a bailout helping its
neighbour to support its state-controlled companies. Debts were
renegotiated and extended.
This time around, no help has been forthcoming.
Abu Dhabi and Dubai were in talks last year to prop up
Dubai’s economy by linking up assets in the two emirates,
sources told Reuters at the time. Dubai denied the report.
Abu Dhabi did not respond to a request for comment.
A perception that Abu Dhabi would, however, support Dubai if
required is factored into the price of Dubai sovereign debt,
according to traders.
Bonds sold by Dubai last year which are due to mature in
2050 are currently trading at a premium of just over 1
percentage point over Abu Dhabi's paper with the same maturity,
despite Abu Dhabi having a top credit rating and much larger
financial wealth.
"Dubai benefits from perceived backing from Abu Dhabi, which
is still an extremely strong credit, and could choose to provide
support if needed," said Richard Briggs, investment manager at
GAM.
($1 = 3.6728 UAE dirham)
(Additional reporting by Saeed Azhar;
Editing by Carmel Crimmins)
((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters
Messaging: davide.barbuscia.reuters.com@reuters.net))