Wednesday, December 9, 2009

What am I bid for this scale model of a Dubai Landmark that may someday exist?

There are two interesting stories on the tape this morning. First is a report by the Eurasia Group saying that UAE Government Related Entities (GREs) may be shut out of the international capital markets altogether if the Nakheel Sukuk holders are not paid out in full. I think this paints the situation with too broad a brush. I think that may be true for Dubai GREs without an explicit government guarantee and now that the credibility of the Dubai government has been severely damaged maybe even with a government guarantee.

This is not the case for Abu Dhabi related companies. While there is some collateral damage to the reputation of the UAE most of the reputational issues are contained within Dubai. This is the other side of the “Brand Dubai” strategy of Dubai Inc over the past ten years. One cannot forget that while Dubai is not likely to be a very important client going forward and so will not get the benefit of the doubt in the hope of future business ADIA, the Abu Dhabi sovereign wealth fund alone is a massive client of Wall Street and the City of London so the credit markets will always be open for Abu Dhabi. Therefore I think there is little incentive for Abu Dhabi to intervene in the Dubai GRE crisis and will step in again if and only if the Dubai government itself is threatened.

The second interesting story is about the cancellation of the merger between Emaar and some of the more challenged real estate groups in Dubai Holding. To see why this is interesting it is important to understand the difference between the various business groups within Dubai. There are two major GREs in Dubai: Dubai World and the Investment Corporation of Dubai (ICD.) These are both owned by the government of Dubai. Sheikh Mohammed himself is the owner of an entity called Dubai Holding.

As I have said in previous posts I believe that it is a certainty that Dubai World will be put into default by the end of the Month. ICD has between $28 and $33 billion in debt but relative to Dubai World it’s asset qualrit is very high and largely based in the UAE and thus harder for international creditors to attach. It’s assets are: Emaar, relatively healthy property developer in Dubai, Emirates the successful airline, Bourse Dubai, Emirates Bank, and Dubal an Aluminium smelter.

Dubai Holding belongs to the Ruler. It consists of DIC, a private equity and fund management business, TECOM, an operator of business parks in Dubai, Jumeriah the global hotel chain, and some property companies: Tatweer, Sama Dubai, and Dubai Properties. Tatweer is one of my favourite GREs. Its responsible for Dubailand a theme park intended to be twice the size of Disney World which I doubt could be profitable even if it is ever completed which I doubt even more. There is a nice architectural model of it that is about the size of a football field though (see photo above.) They also planned to These were intended to be merged with Emaar until the deal was cancelled today. Now why might that be?

The reason announced by the rulers office was that the deals “were not economically viable.” My guess is that the deal was never economically viable in the first place and in fact that was why they wanted to do it. I think the objective was to transfer the weaker entities into a stronger one in order to mask and minimize their weaknesses. So why cancel it? My guess is that Dubai is waking up to the realities of cross default.

If they had combined Tatweer, Sama and DP with Emaar and then there was a default, the assets of Emaar would be up for grabs by international creditors. Better to keep the weak entities separate from the strong in that case and ride out the storm. If this really is a sign of a mentality change in Dubai I think that’s a good sign for Dubai and for creditors of viable entites. For people who invested in scale models titanic theme parks, not so much.

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