Thread: No Thanksgiving for Investors:Dubai's Debt Woes Rattle Stock

No Thanksgiving for investors: Dubai's debt woes rattle stocks around the globe

Peter Cohan
Nov 26th 2009 at 9:27AM

Thursday is one of those days when I wish I could be reincarnated as Jon Stewart. I am certainly hoping that when he returns to live broadcasts, he can find the funny in the media's obsessive coverage of the State Dinner crashers. And if he does this, he should note that while the media salivated over the Salahis, it ignored a far more important story -- Middle Eastern petro-state, Dubai, was defaulting on its debt.

Problems with Dubai's finances are not a big surprise. As I posted in February, I first got wind of the potential for a huge collapse there back in 2005 when I read an article in the New Yorker which discussed Dubai's world record breaking pace of commercial real estate development as its government sought to diversify away from oil.

And Dubai is perhaps just one extreme example of a bigger problem. As I've posted, the $6.7 trillion commercial real estate lending industry has been dangling out there as the potential cause of a double dip economic contraction. But I did not anticipate that Dubai's inability to repay its debts would be the straw that would break the back of commercial real estate.

How so? The New York Times reports that a subsidiary of Dubai World -- the corporate arm of a country that will pay Rihanna $500,000 to sing at a New Years Eve party at the Emirates Palace Hotel in Abu Dhabi -- has asked its creditors for a break.

Specifically, Nakheel, the developer of palm-shape islands owned by Dubai World, wants its creditors to accept a six month delay in a $3.52 billion repayment on its Islamic bonds due December 14th. (Dubai World's liabilities total $59 billion).

The rest of the financial world is not thrilled with Dubai -- whose debt totals $80 billion. DealBook reports that the cost of insuring Dubai government debt against default using five-year credit default swaps spiked up 32% from 318 Tuesday to 420.6 Wednesday. And Nakheel's Islamic bond prices fell over 20 points to 87.

And in a move reminiscent of last fall's global financial collapse, world markets fell sharply on fears of contagion from rising nervousness -- possibly by lenders to commercial real estate projects in similarly dire financial straits. Britain's FTSE 100 was down 1.9%; Germany's DAX fell 2%; France's CAC-40 declined 2.2%; the Shanghai index tanked 3.6%; and Hong Kong's Hang Seng lost 1.8%, according to The Associated Press.

Simply put, it looks like Dubai is making the world look like bigger turkeys this Thanksgiving than the Salahis did to White House security. Meanwhile, I'd advise Rihanna to get paid up-front.

http://www.dailyfinance.com/2009/11/26/ ... -stocks-a/

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

"....dozens of gleaming new towers that mark the city's skyline stand empty. Even camps for migrant workers have posted "to let" signs after the building boom...."

Oct 4, 1:43 PM EDT

Dubai's ruler downsizes ambitions amid crisis

By BARBARA SURK
Associated Press Writer

DUBAI, United Arab Emirates (AP) -- There was a time when Dubai's annual property fair was a gilded stage for the ruling sheik to unveil his latest, anything-goes dreams: the world's tallest towers, canals in the desert and artificial islands in the sea. As this year's fair begins Monday, the global recession has sharply downsized those visions and taken much of the boomtown bravado from the city-state's CEO-style ruler.

The Cityscape expo is expected to be far more subdued than in years past. The shift reflects Sheik Mohammed bin Rashid Al Maktoum's passage from big-ticket visionary to more cautious steward of the Gulf emirate's sand-to-skyscraper transformation.

"Nobody is talking about grand projects or being No. 1 anymore," said Abdul-Khaleq Abdullah, a political science lecturer and Dubai native. "There's a sense from top to bottom that we need to tone it down."

Although Mohammed has been credited for Dubai's stunning makeover, which was fueled by borrowed money and surplus cash from the Persian Gulf's oil profits, he has yet to assume responsibility for the city-state's property bust and admit to faults in his business plan.

A year after Dubai became the Gulf's biggest credit crunch victim, dozens of gleaming new towers that mark the city's skyline stand empty. Even camps for migrant workers have posted "to let" signs after the building boom ended and billions of dollars worth of projects were scrapped or put on hold, including a half-mile-tall (kilometer-tall) skyscraper that was announced at last year's Cityscape.

Despite the grim economic reality, Mohammed is not apologizing.

"I don't think we made any mistakes," he said recently at a rare gathering with reporters. He added that in the future "our strategy will be mainly the same, but things will change a little bit because of this crisis and we will be more careful now."

Careful is not a word often used to describe Dubai's 60-year-old-patriarch. Mohammed's unshaken confidence and limitless ambition to place Dubai in the same league as London or New York has earned him labels like "arrogant" and "over-the-top," but also "daring" and "courageous."

That mix fits Mohammed's personality and ruling style in a region where a well cultivated personality cult is part of good governance. The stark contrast also reflects Mohammed's bipolar Dubai - a modern Arab metropolis, pious in faith and daring in all else.

Like his Muslim city-state with a Western outlook, Mohammed is stuck between deeply rooted Arabian traditions and raw ambitions for modernity.

A passionate lover of horses and a breeder of camels, Mohammed rides long endurance races in the desert and drives a customized Mercedes four-wheel drive SUV along Dubai's sprawling highways. He listens to residents' complaints the old-fashioned way, in his diwan, but also regularly updates his Facebook profile and exchanges tweets with Dubai's youth.

"We want Dubai to be the world's number one city for commerce, tourism and services," Mohammed wrote in his 2006 autobiography grandiosely titled "My Vision." It included building the world's tallest skyscraper and extending the emirate's shoreline with artificial islands shaped like a palm tree or the map of the world.

Jean-Francois Seznec, a Gulf specialist at Georgetown University in Washington, D.C., said there was "quite some arrogance" in Mohammed's vision for Dubai but that "without it, it's hard to imagine some things would have been undertaken."

And to make that vision reality, Mohammed had to incur massive debt "that is now owed by the emirate," Seznec added.

With little cash available to borrow abroad to pay off his debt, Mohammed was forced to turn to Abu Dhabi's rival Nahyan family for help. The business plan of the United Arab Emirates' oil-rich capital has emerged as a confident alternative to the dwindling foreign investment in Dubai.

And while some of Dubai's extravagantly shaped island developments are stuck on the drawing board, Abu Dhabi is zooming ahead with development on its islands. Abu Dhabi's Yas Island will host its first ever Formula 1 race next month and Saadiyat Island will soon lay the foundations to the Mideast branches of the famed Guggenheim and Louvre Museums.

Mohammed has brushed aside pointed questions about Dubai's debt, which is estimated to be at least $80 billion. When recently asked about it, he confidently replied: "I assure you we are all right. ... We are not worried."

It's not just Abu Dhabi's cushion he's relaying on.

Dubai owns a profitable airline, Emirates, and its massive airport is an important hub between Europe and Asia. The emirate's port and the adjacent free-trade zone both rank among the world's largest and most efficient harbors and trade centers.

Just a few years ago, due to Mohammed's marketing skills business fell behind the curve almost overnight if they didn't have an office in Dubai. Some multinational companies even made the emirate their regional headquarters, and company executives rubbed shoulders with Hollywood stars like Charlize Theron and famous athletes like Tiger Woods.

"Sheik Mohammed did a great job marketing Dubai as a sexy destination," said Rochdi Younsi, of Eurasia Group, a Washington, D.C.-based research group that assesses political risk for foreign investors interested in Dubai.

Mohammed's business approach to politics in a region plagued by conflict made him worth US$12 billion, according to Forbes' June ranking of the world's richest monarchs. It also turned him into an Arab leader the West could easily deal with.

"Western leaders would not be afraid to appear publicly with him," Younsi said. While it was realistic to assume Dubai would be a popular transit spot for people and goods, it may have been too ambitious to think Dubai could keep growing as a top tourist destination and a place for people to buy vacation homes.

"It hardly made sense to assume that the demand for Dubai will always be high," Younsi said. He noted the emirate's long and hot summers, vague legislation regulating property and ownership and randomly enforced decency laws that have landed several Western tourists in jail as drawbacks.

With the legal system lagging behind Dubai's speedy development, some say the economic crisis was a blessing in disguise for the emirate. Others are convinced Dubai's quieter - even humbler mood - is only a break in Mohammed's limitless ambition.

"Crisis or no crisis, with Sheik Mohammed we'll always have a leader who wants to go to the top," said Abdullah, the political science lecturer. "That's the fate of Dubai."

http://hosted.ap.org/dynamic/stories/M/ ... TE=DEFAULT

this is quite an old story and evidently this link is no longer active.

Dubai request for debt 'standstill' raises fear

Nov 26, 3:38 PM (ET)

By BARBARA SURK

DUBAI, United Arab Emirates (AP) - Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills - causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.

The fallout came swiftly and was felt globally after Wednesday statement that Dubai's main development engine, Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel - whose projects include the palm-shaped island in the Gulf - shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.

Markets took the news badly - with the Dubai woes and the continued fall of the U.S. dollar giving investors twin worries. Dubai's move raised concerns about debt across the Gulf Region. Prices to insure debt from Abu Dhabi, Qatar, Saudi Arabia and Bahrain all rose by double-digit percentages Thursday, according to data from CMA DataVision.

In Europe, the FTSE 100, Germany's DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119.19 points, or 3.6 percent, in the biggest one-day fall since Aug. 31. Hong Kong's Hang Seng shed 1.8 percent to 22,210.41.

Wall Street was closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.

"Dubai's standstill announcement ... was vague and it remains difficult to discern whether the call for a standstill will be voluntary," said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

"If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general," the statement added.

Dubai became the Gulf's biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state's liquidity and claims it overreached during the good times.

When asked about the debt, he confidently assured reporters in a rare meeting two months ago that "we are all right" and "we are not worried," leaving details of a recovery plan - if such a plan exists - to everyone's guess.

Then, earlier this month, he told Dubai's critics to "shut up."

"He needs to produce a recovery plan that will be respected by those who want to do business with Dubai," said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy. "If he does not do it right, Dubai will be a sad place."

After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.

In February, it raised $10 billion in a hastily arranged bond sale to the United Arab Emirates central bank, which is based in Abu Dhabi.

The deal - seen by many as Abu Dhabi's bailout of Dubai - was part of a $20 billion bond program to help Dubai meet its debt obligations.

On Wednesday, the Dubai Finance Department announced the emirate raised another $5 billion by selling bonds - all taken by two banks controlled by Abu Dhabi.

Abu Dhabi's ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture and state institutions. During Dubai's real estate bonanza, the Nahyans saw their flashy neighbor race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.

Some did materialize. The more than 2,600-foot (800-meter) Burj Dubai is scheduled to open in January as the world's tallest building. But many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints.

The standstill will likely not immediately affect CityCenter, an $8.5 billion casino complex opening next month in Las Vegas that is half-owned by Dubai World. A Dubai World subsidiary and casino operator MGM Mirage agreed with banks in April to fully fund and finish the six-tower, 67-acre development of plush resorts, condominiums, a retail mall and one casino on the Las Vegas Strip.

However, the standstill's effect may be felt on the famous Keeneland thoroughbred horse auctions near Lexington, Ky., where Sheik Mohammed is a prominent bidder.

Last week, Sheik Mohammed demoted several prominent members of Dubai's corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed's designated heir.

Businessmen who fell out of favor were closely associated with Dubai's phenomenal success. They include the head of Dubai World, Sultan Ahmed bin Sulayem, and Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and hundreds of other projects.

"He is trying to shake things up," said Christopher Davidson, a lecturer on the Gulf at Britain's Durham University and an author of two books on the UAE.

However, Davidson added, Mohammed's decision to replace those who helped put Dubai on the world map with his relatives might be "read as an increase in autocracy which does not look good internationally."

Not everyone is upset at Dubai Inc.'s transformation into a family business, analysts say.

Mohammed's latest moves may have pleased Abu Dhabi more than the foreign investors, but it is Abu Dhabi that still has the strongest incentives to save Dubai from its financial misery.

"By shifting the power base back to the family things are as they should be as far as Abu Dhabi is concerned," said Mohammed Shakeel, a Dubai-based analyst for the Economist Intelligence Unit.

After an expensive adventure in doing things the Western way, it's "going back to basics" for Dubai, Shakeel added.

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Associated Press writer Oskar Garcia in Las Vegas contributed to this report.


http://apnews.myway.com/article/20091126/D9C7EEHO1.html