Monday, December 14, 2009

Look up in the sky, is it a bird? Is it a plane? No! It's SuperNahyan bringing money and legal certainty for DW creditors!!



Readers of this blog will know by now that Abu Dhabi has stepped in with a $10 billion contribution to the Dubai Financial Support Fund. Counter to previous statements this money will be used to support Dubai world and cover its debts, interest payments, and trade creditors until the end of April 2010. At the same time, the Ruler of Dubai has issued a decree establishing a clearer course of action should the insolvency or liquidation of Dubai World itself or any subsidiary become necessary.

This may seen as a victory for Dubai and it certainly is one for the folks who stepped in and bought the Sukuk and sought to intimidate the Emirati government into paying off in full as well as a catastrophe for those who put their faith in Dubai and then sold when Abu Dhabi seemed to step back. Fortune it seems has favoured the bold.

In some ways it should also be read with a note of caution. Abu Dhabi has now committed $5 billion more than it initially planned to the Dubai Financial Support Fund. The fact that Dubai World needs a cash infusion of $10 billion in order to keep it alive for six more months is a sign that things are Dubai World are worse than many of the more pessimistic assumptions and certainly mine and give the lie to the idea that a restructuring on its own was even remotely possible. There can be no doubt that had Abu Dhabi not stepped in there would have been a catastrophic default.

The fact that Abu Dhabi restored its support after its’ earlier decision to revoke it restores the solvency of Dubai but leaves the credibility of the Emirates in doubt. There remain serious problems at Dubai Holding and ICD. Investors will now assume that Abu Dhabi will support those as well and will be less inclined to believe Abu Dhabi will let those fall despite the comments that other Dubai entities would be supported on a case by case basis. Additionally the outside world will have no insight into the discussions between Abu Dhabi and Dubai that led to this.

Dubai has taken the positive step of trying to provide legal certainty around the potential insolvency of Dubai World by establishing a tribunal of DIFC judges and giving them jurisdiction over it and applying the DIFC insolvency law (which is close to UK law) to all actions taken against Dubai World. Interestingly the text of the announcement says that Dubai courts _may_ enforce judgements of the tribunal. It would be more helpful if that read that the Dubai courts _will_ enforce the judgements. Nonetheless, it should give creditors some comfort.

My personal view is that this is a helpful but only a partial reform. Why make a law specifically for Dubai World? Why not extend it to ICD and Dubai Holding? Or for that matter the whole of Dubai? Though off the hook for now, Dubai’s access to capital is likely to remain constrained for some time. It would very much serve the Emirate to establish legal certainty over commercial transactions in Dubai. I would argue that the whole of the Arab and Muslim world could benefit as well, this will have to be a subject for another post.

3 comments:

Mike said...

Ken,
Why is Abu Dhabi pumping in $5B more? Will Dubai Financial ever generate good returns to make the investment worthwhile?

Anonymous said...

When Dubai said DW was not guaranteed by the govt...a nice room full of traders in london stood ready with fingers on the "buy" button prepared to sccop up the debt at 45 or 52 cents or whatever...(on behalf of you know who)..which they did...the AD to the rescue...bonds explode up...Sweet trade...debt burden reduced..life is good...

Ken said...

I really don't think that's how it played. The increased borrowing costs on account of that head fake will more than offset whatever they would have made on that trade not to mention the fact that if they had waited for the Nakheel Sukuk to redeem and then done it they would have been far more effective because there was no Dubai World guarantee on the other debts.