Monday, January 11, 2010

Dear passengers once we land there will be a slight delay as we taxi the plane into the bank accounts of the firms who built the Dubai Metro.

Bloomberg Today reported that CMA Datavision is now publishing quotes for CDS on Emirates Airlines. This is an interesting story not so much for the fact of it but for the timing. It’s no secret that lately Dubai has been struggling with debts. Dubai Ports World CDS have been trading as a proxy for all things Dubai especially as DPW was part of Dubai World. Dubai world of course is the parent company of Nakheel, the center of a dramatic cliffhanger after it asked for a debt standstill agreement and was subsequently bailed out by Abu Dhabi.

Emirates Airlines however is owned by ICD. Generally the asset quality inside ICD is better than that inside Dubai World or Dubai Holding for that matter. Why the sudden interest in Emirates Airlines CDS? After all, Emirates Airlines is doing relatively well despite the issues in Dubai itself and has been consistently profitable. ICD is doing relatively well compared to Dubai Holding and Dubai World. Well, the owner of ICD is the government of Dubai and that may be where the problem is and with it the next chapter of the Dubai saga.

It seems that the Dubai government has gotten itself into trouble with some Japanese companies. A while back, when Dr. Omar was right and the only real problem in Dubai was the traffic the government of Dubai decided to build a mass transit rail system. It put out a tender for it and requested that the bidders secure 90% funding. The Bin Laden Group, a massive Saudi construction firm (as opposed to the small Pakistani destruction firm of the same name,) secured Chinese funding and looked to win the bid. My guess is the Dubai government was loathe to grant the contract to a Saudi company so they withdrew the requirement and promised to pay themselves. As a result they awarded the contract to a consortium of Japanese companies.

Fast forward today and as is well known the Dubai government is... well.... a little strapped for cash. As a result they’re a little behind on paying the Japanese. It seems like the shots are increasingly being called in Abu Dhabi and the Japanese are probably getting nervous about their money. There isn’t a lot they can do about the work they have already done, it’s done and it’s in another country. They have stopped work on the rest but there is a lot done already and they are short something like $7.5 billion.

So what is the next stop for the Dubai Metro? Litigation Central. My guess is that the Japanese contractors have taken a page from the QVT play book and are going to sue the government of Dubai outside the UAE for recovery of what they are owed. Just like with QVT and Dubai World the thing to look for is what international assets does the government of Dubai have? Well, there are the international assets of Dubai World which I discussed at length during the Nakheel adventure which consist mostly of maritime infrastructure, real estate, and private equity holdings: nothing particularly liquid but nonetheless valuable. How about ICD? Well, most of its assets actually are in Dubai proper and therefore hard to get at with a judgement from an international court. Then there is Emirates Airlines.

Emirates Airlines is headquartered in Dubai but of course at any given time its assets are to be found outside the country: it’s planes. The Japanese Consortium could seek a judgement against Dubai in an international court and then seek to attach and arrest the planes belonging to Emirates Airlines. This is vastly simpler than repossessing the real estate assets of Dubai world would be, and the secondary market in commercial aircraft is far more liquid than that for real estate (especially now) or ports. Emirates does lease some of its planes but most it owns outright and about half of those that it leases it leases from other entities also owned by the Dubai government. It will probably also scare the hell out of Dubai and maybe Abu Dhabi to have repo men coming after their beloved A380s all over the world. As with the Nakheel Sukuk holders maybe they'll just pay off to avoid the embarassment.

This is all very bad news for you if you are a creditor of Emirates Airlines. The nature of the business requires that the primary assets be constantly flying outside the UAE to countries that are likely to enforce judgements obtained in UK, US or Japanese courts. If the planes are kept inside the Gulf where they are not likely to be seized by creditors of Dubai it can’t earn the income necessary to pay you. You might want to call up your friendly neighbourhood CDS dealer and hedge out your risk, and that is what I think is happening. Watch this space.


Anonymous said...

The Japanese built that metro system totally on unsecured credit
to Dubai?

I can't imagine the BoD of the Japanese construction firm let that happen. Surely their equity can be wiped out now.

No Japan Government guarantee involved somewhere?

Anonymous said...

From what I understand the Emirates CDS have been trading for some time and they are quite liquid, its only CME that has just started to publish the data

Ken said...

Hmmm.... Emirates are Liquid? Thanks for pointing out an error. Do you know if there is a market for Nakheel?

Anonymous said...


Oh my dear good Sir,

May I interest you in some Villas on the sea side on a to be built artificial island


perhaps some Nakheel Bonds