Tuesday, January 19, 2010

News from Dubai

So there has been a tidal wave of news out from Dubai. The most interesting thing to me is that Abu Dhabi has clarified that when it said it was bailing out Dubai with another $10 billion the night before the Nakheel Sukuk was due what it really meant was that it was just adding $5 billion to the $5 billion that had been lent by Abu Dhabi banks on the day that Dubai asked for a debt standstill and touched off a global selloff. I’m not sure what to make of this. It seems to me that this is kind of an important reversal but though Dubai debt has traded off today people are not thinking this represents a major change in policy for Abu Dhabi and the markets still seem to think that AB will be there when Dubai runs out of cash again in May.

Bourse Dubai announced that it will roll its debt another year. I’m not sure if this is mandatory on the banks or not. Bourse Dubai, as mentioned in an earlier post, borrowed the money near the peak of last cycle to buy shares of the London Stock Exchange and NASDAQ OMX both of which have been roughly cut in half. It’s not clear to me whether it is mandatory for the banks to roll the debt or not. It may not turn out to be a big deal anyway. A lot of the debt is held by UAE banks which are subject to political pressure and can lend money against the DFM state of Bourse Dubai which is more than enough to cover the loan.

To me the most interesting story is about a “VIP Investor” by the name of Lothar Hardt who is suing Damac, a Dubai real estate developer, for not actually building the real estate he bought off. Allegedly Mr. Hardt was duped into parting with almost $10 million by Damac to buy apartments that had not yet been built in developments that had not been registered on land that Damac did not own. Oh boy.

Personally I have no sympathy whatsoever for Mr. Hardt. Interestingly the non-existence of these non-registered developments on unowned land did not stop Mr. Hardt from signing agreements to rent them out to third parties so presumably he is also liable. I think it’s pretty likely that he has flipped more than one off plan apartment before. He knew the game and the game was million dollar game of musical chairs. You had to flip your non-existent, non-registered apartments built on land you did not own before the global liquidity music stopped. When the music stopped Mr. Hardt did not have a chair and now he also does not have his millions. I’m sure many investors are aware that the reasons you get better return in emerging markets is that the chances that your money vanishes altogether are much higher. Sorry big man. You pays your money you takes your chance.

There are a lot of people in Mr. Hardts position but most of them are taking it like a man. Mr. Hardt is taking it like an American and he is going to court, and this is where it gets interesting. Hardt has decided to sue in the DIFC rather than the UAE proper. Damac has a finance company registered in the DIFC and the DIFC has is a UK common law based jurisdiction as opposed to the Sharia based UAE. Clearly he hopes that he will get a better deal in this jurisdiction than he would in the UAE proper and if the DIFC courts agree to hear the case he almost certainly will. Clearly it would be a fiasco for Dubai if Mr. Hardt were to win this case as there would then be a deluge of similar cases but my guess is that the contracts he signed contain a lot of boilerplate disclaimers which would crush him in either jurisdiction. I think he is using the need for the DIFC to be seen as a reasonable jurisdiction for the Dubai World tribunal to get a quick settlement. The trouble for Mr. Hardt is that there is a pretty good case to be made that his contracts were all signed in the UAE proper with UAE based agents so my guess is that the DIFC courts will remand his case back to the UAE proper where he will get nothing and like it.

I’ll tell you what though, there is a group of people who sure as hell have standing to sue in the DIFC and so far have not. If you have been reading my blog you know who they are: the Damas Shareholders.

This is a partial post, I'll put the rest up when I finish it.


Rupert Neil Bumfrey said...

The roll-over option was for BorseDubai to exercise or not and with cost of loan at 325bps over LIBOR, wouldn't you exercise for your benefit?

Poor old Bank of Baroda seem to have got sucked in and I commented at the time how unusual their participation was, and with deference to BoB I said "Oh dear, usual sources of leverage are drying up!".

What continues to amaze me is the lack of awareness of so many here in UAE, Nationals and Expats alike, with regard Dubai's funding model, plus those International experts who wrote of Dubai's SWF. I remain of the belief that SWF's are the recipients of surplus income, something which Dubai has not received for many years.

Ken said...

I agree that the Bourse Dubai syndicate did include some unusual names.

I wish I could write on the Dubai funds but I have a conflict which prevents me from doing so. It's a fantastic story.

Rupert Neil Bumfrey said...

"This has postponed the problem and not solved it," a banke...."
February, 2009!

Anonymous said...

Hey, the real news is this


Let us see... you borrow from the rest of the world and splurge it on race tracks...

this is as bad as borrowing from others to wage a war... wait a minute the US is already doing that