Tuesday, December 8, 2009

I'm shocked! Shocked to find that gambling has been going on in Dubai real estate!

Boy what a bad day to end the previous nights blog with “things are looking up for the bondholders and Dubai.” A flood of news today.

1.) Bloomberg reported that Nakheel lost $3.65 billion in the first half. Most of this was writedowns on real estate holdings.

Nakheel reported $40 billion in assets as of the end of June though that number has most likely fallen as well. Not a good sign to have your assets decreasing 10% every six months while you are trying to renegotiate your debts which are secured by those assets. Especially if you are carrying a non-existent island on your books for over $1 billion.

2.) Abdulrahman Al Saleh the Director of the Dubai Department of finance revealed that Nakheel had received $2.45 billion from the Dubai Financial Support Fund.

This fund is money raised from Abu Dhabi and Abu Dhabi based banks in a $10 billion and a recent $5 billion tranche. It is likely that transfer happened some time ago in order to pay creditors and prevent a default event from occurring even earlier. This is an interesting revelation. Al Saleh was careful to point out that this was the Dubai government “supporting” rather than “guaranteeing” Nakheel. Indeed, he is correct but it kind of makes me think of Captain Renault in the movie Casablanca leaving the closing Ricks’ cafe. “I’m shocked! Shocked to find that when the Dubai government gave $2.45 billion to Nakheel to forestall a default that you interpreted this ‘support’ which prevented a default as a ‘guarantee’ that we would always prevent default.”

3.) Istithmar World lost control of the W Hotel in New York (visible from my bedroom window) in a foreclosure auction.

Boy Al Saleh was not kidding when he said that there would be asset sales in the Dubai World restructuring. I just didn’t think he meant forced asset sales.... today! This is actually probably the most important news of the day. One of the things that is hard for international investors to gauge is who is in line in front of who for what assets there are left in Dubai World. What off balance sheet debts are there secured by the various assets? It’s one thing to look and see a Dubai World entity on the shareholder register of a major company or on the deed to a piece of real estate. Quite another for the entity to liquidate that asset and have anything left after the secured creditors have been paid off to send up to the parent company to make the bondholders whole. I’m not sure how much information there is on the degree to which the assets of the DW subsidiaries are already pledged to secured creditors ahead of the creditors of the parent company but this will have a massive impact on the recovery at the parent company level.

4.) Moodys Downgraded Six Dubai Entities including a downgrade of Dubai Ports World to junk.

Now this is interesting. I thought DPW was on a firm financial footing. Why would Moodys downgrade them to junk? I think it might have something to do with the comments on asset sales. DPW may well be on a firm financial footing given it’s current asset portfolio and the current debt levels. But what happens if to pay off the creditors of Dubai World, DPW starts to sell assets and pay dividends to the shareholders to transmit the proceeds to the parent company. Well then the asset base used to generate income to pay the bondholders shrinks and that will weaken the credit quality of DPW. In one of my first posts I said I thought it would be hard for Dubai to ring fence the segments of Dubai World that were on a “firm financial footing.” It would seem that I was correct but much more quickly than I would have thought. It’s probably the case that Moodys had this in the hopper for a while but I think the timing of this announcement is pretty good.

None of this is good news for Dubai or its creditors. The events of today I think make the default of Dubai world a certainty. If you were a bank and were unclear which assets in the subsidiaries could be sold to yield any proceeds beyond what would go to the secured creditors and the jewel of the group had just been downgraded to junk, would you extend enough credit to pay off the bond holders? Today’s news also throws into doubt what the chances for recovery for the bondholders. My guess is the talks with the bank lenders are not going too well. It looks to me like all involved are about to take a spin of the roulette wheel.

Going foreward, in keeping with the ethos of the region I will occasionally spin conspiracy theories.
The Bloomberg Article on the Nakheel earnings cites a document “acquired by Bloomberg.” Who would have leaked that? One of the banks? One of the bondholders? Surely someone who wanted to put pressure on Dubai. Well, the pressure is on.


Anonymous said...

I was wondering what made you say things were looking better for Dubai.. ..well everyone has the odd bad day at work!

Ken said...

I think it was the fates taking revenge on me to high fiving myself over leading Bloomberg.