Dubai, the City of Gold, and the Recession

Tue, Dec 8th 2009, 11:57

Dubai, the City of Gold, is not recession proof after all. This has become apparent after recent announcements that Dubai’s State owned holding company Dubai World is seeking a stay of execution for its whopping $4bn debt due to be repaid this month.


Dubai is the City of Gold no longer it would seem. Three years after issuing the world's biggest Sukuk (an Islamic bond), Dubai World's property arm Nakheel has indicated that it is unable to meet the $4bn payback due on 14 December.

The Dubai government has indicated that it is not willing to take responsibility for Dubai World's debt. International investors are furious as they paid high prices for the bonds with the belief that they had the backing of the Dubai government. However the government has announced that it has no intention of selling off any of its own assets to help out the struggling Dubai World.

The troubles stem from the fact that Dubai World and its subsidiaries have made use of short-term loans to finance their long-term building projects. The repayment periods are now coming up and the companies are not in a position to meet their obligations at this stage.

Frantic negotiations are being conducted with creditors. The most immediate concern is the bond repayment due on 14 December. There are two other bonds maturing after this, and total debts are a staggering $60bn. Dubai World plans to suspend all debt repayments for 6 months.

There is much speculation about Dubai World's very juicy international assets and which of these will be sold off to help the cash strapped operation. The most valuable holding is a 2.2% stake in British Bank Standard Chartered which is believed to be worth about $1bn. Other holdings include P&O Ferries, the QE2 cruiseliner, circuis group Cirque du Soleil, a stake in MGM Mirage and Casino, 80% in the world's fourth largest port operator DP World Ltd and US luxury retailer Barneys.

A consortium of mainly US-based hedge funds which hold 25% of the Sukuk bond due on 14 December are considering legal action to force the hand of Dubai World. They are possibly eyeing the valuable waterfront Dubai properties and premium foreign holdings of Dubai World, Nakheel and investment arm Istithmar.

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