$10bn support for Dubai World from Abu Dhabi, Central Bank

Dubai today unveiled a sweeping US$10 billion (Dh36.7bn) rescue package from the Abu Dhabi Government that will allow Dubai World to deal with a slew of immediate financial obligations, including a $3.5bn Islamic bond that is due today. The move ends months of speculation about how Nakheel, a developer owned by Dubai World, would pay off the sukuk amid declining property values and a slowdown in sales that left it virtually bereft of revenues. It also represents by far the most direct and explicit support of Dubai to date by the Abu Dhabi Government in the wake of the financial crisis. The crisis battered property values in Dubai and slowed its ambitious growth plans as it struggled to find a solution to a crippling debt load that has been estimated at $85bn, a total greater than Dubai's annual GDP. "Like other global financial centers, Dubai has faced recent market challenges driven by the global economic slowdown and a severe real estate market correction," Sheikh Ahmed bin Saeed al Maktoum, the chairman of the Dubai Supreme Fiscal Committee, said in an e-mailed statement announcing the cash injection. Earlier this year, the Dubai government set up the Dubai Financial Support Fund (DFSF) to help its ailing government-controlled companies. The aim, officials at the fund said, was to give loans on commercial terms to struggling firms that had bright long-term prospects. The fund was seeded with a $10bn bond entirely subscribed by the Central Bank of the United Arab Emirates. A further $5bn in financing was lined up last month from two Abu Dhabi government-owned banks, Al Hilal and National Bank of Abu Dhabi. The new $10bn will be transferred to the DFSF, although the Supreme Fiscal Committee, which oversees the fund, did not say what terms and conditions may be attached to the cash injection. "Recently, Dubai World announced that it might not be able to commercially support its obligations," Sheikh Ahmed said. "Since that time, the Government of Dubai has worked closely with the Abu Dhabi Government and the UAE Central Bank in addressing and assessing the impact of Dubai World on the UAE economy, banking system and investor confidence." Dubai World on November 25 said it was seeking a standstill agreement with creditors to halt payments on $26bn in debt until at least May 30. That Dubai's biggest government-owned conglomerate appeared unable or possibly unwilling to meet its financial obligations on time shook investor confidence in the Gulf and around the world. The announcement, made on the eve of the Eid al Adha holiday, was followed by a drop of over 25 per cent in Dubai's stock market index. The $10bn in assistance announced today appears to be aimed squarely at restoring shaken confidence following Dubai World's restructuring announcement. "We are here today to reassure investors, financial and trade creditors, employees and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheikh Ahmed said. "Dubai is, and will continue to be, a strong and vibrant global financial centre. Our best days are yet to come." The new $10bn in funding is to first go towards repaying Nakheel's sukuk due today. While the company will likely miss today's deadline because of the time it takes to clear and process large financial transactions, they have a two-week grace period in which to make the payment and avoid a default. The sukuk has a face value of $3.5bn, but Nakheel must pay about $4.1bn to satisfy an unused equity conversion option and make other deferred payments. Sheikh Ahmed said in the statement that "the Government of Dubai has authorised $4.1bn to be used to pay the sukuk obligations that are due today", implying that the debt would be repaid in full, contrary to reports that Dubai World might seek to renegotiate a sizeable portion of it. After the sukuk is repaid, the remaining slice of the $10bn from Abu Dhabi is to be used by Dubai World to make interest payments on outstanding loans and bonds and as "working capital" to fund everyday operations. The rest, the statement said, would go towards making good on trade finance agreements and repaying contractors. Foreign contractors doing business with Dubai World have long complained that they have not been paid in full for their services. "Discussions with affected contractors will begin in short order," Sheikh Ahmed said. The new money is intended to support Dubai World's operations until next April 30. The company is still to seek a standstill agreement with creditors, and continuing support of everyday operations will be contingent on Dubai World securing such an agreement. The statement also said an announcement was forthcoming today about a "reorganisation law" that would protect creditors in case Dubai World was unable to come to terms on a restructuring of $26bn in debts. "Today the Government of Dubai will announce a comprehensive reorganisation law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said. "This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations." afitch@thenational.ae