Dubai in November, 2009

Dubai - did the
"Day-after-Tomorrow-Country"
arrive into "Today"?

Doubtless - Dubai surprised at 25th of November 2009 financial circles around the globe with the announcement to ask all debtors of Dubai World (DW) and NAKHEEL for moratorium and a prolongation of all loan contracts for a period of 6 months. The debt volume of Dubai Emirate with 80bn $ is nothing new, but new seems to be on one hand the high dimension debt share of DW with 75% of total debt - and on the other hand a lesson, that Dubai isn’t able to repay "any amount at any time". But, this global surprise and dramatic feedback gives partially also the impression, the rest of the world has been convinced that Dubai would have taken its debts "just for fun" without any need.

Looking at reports and articles more in detail, there comes only one main cause of this dilemma in the foreground: the world’s biggest Real Estate Developer NAKHEEL, subsidiary of DW. The builders of Dubai’s unique Palm, Waterfront and World Archipelago projects have been fully caught by the property downfall, caused by the global financial crisis. NAKHEEL is in duty to pay back December 14th, 2009 an Islamic Bond (Sukuk) in the amount of 3.52bn $. This seems to be the initial reason for the unexpected step to ask for moratorium.

At this stage, we prefer to sort all crisis relevant facts along with many elementary perspectives of Dubai as a business location - also embedded into the federation of the United Arab Emirates.

A - Facts about the occasional Insolvency of DW Dubai World

Since summer 2008, DW is underlying a massive restructuring process under the supervision of DFSF Dubai Financial Support Funds. For this reason, Aidan Birkett (Deloitte) has been appointed as Chief Restructuring Officer (CRO) of DW Group.

October 15th, 2009, DW itself announced that most tasks of this restructuring have been finished: job cuts in the amount of 12,000 people (in majority cuts at NAKHEEL) shall support the target of a 800mn $ cost cut over the next three years. Members of Dubai government frequently confirmed - as it also has been expected from them -, that the Emirate would fulfill its payment duties.

But along with the replacements in ICD Investment Corporation Dubai there seems to be also change of course: newly aggregated bond funds - especially 5bn $, signed by two Abu Dhabi based banks last week as a further tranche of Dubai’s 20bn $ restructuring bond - shall be allocated exclusively to profit generating projects inside Dubai’s portfolio of state controlled enterprises.

DW, especially NAKHEEL seems not to be part of this profit group. The deadline December 14th including, the group has to burden a repay volume of 9bn $ till the end of March, 2010.

The case DW is causing a lot of questions - parts we will try to answer in the following.

 
What exactly is Dubai World?

DW primarily is not equal with the archipelago "The World", which has been built by NAKHEEL ahead of Dubai’s shoreline in the Arabian Gulf. DW is a majority state owned corporate conglomerate with activities in ports, real estate, commodities, business zones and investment.

Well known subsidiaries of DW might be

• port operator DP World
• real estate developer NAKHEEL
• Jebel Ali Free Zone Authority (JAFZA)
• Dubai Ports & Customs Authority (DPCA)
• DMCC Dubai Multi Commodities Centre (Free Zone Jumeirah Lake Towers)
• online trading platform TEJARI
• PE fund IWC Istithmar World Capital

  
How are the liabilities structured?

DW itself reports first of all direct debts in the amount of 8.75bn $. According to estimates by Deutsche Bank far higher direct debts of DW’s subsidiaries - mainly from the source NAKHEEL - have to be added with an amount of 15.52bn $. In total, DW’s group debts are amounting by this 24.27bn $.

The actually everywhere named 59bn $ are, containing the direct debt, a consolidation with unpaid invoices, but also non-debt obligations from governmental land grant. This means a priori that a generally different definition of debt is underlying, as it is the case in Europe for example. "Pending" liabilities and duties towards the Dubai Emirate seem to make at least 25% of the total amount of liabilities. Evaluating the case under the conditions of European insolvency procedures, at least 15bn $ would have to be deducted from the total of 59bn $ - as non-counting liabilities towards the own shareholder!

Roughly 44bn $ are remaining as critical - for sure still a lot, but maybe not such a disaster as communicated.

 
Why is DW in problems to repay its debts?

First of all DW is in a liquidity bottleneck due to fall of property prices (-50%), investment losses and a global dry out of credit markets. This did lead the group to absorption of very short running bonds. DP World and IWC have been always excluded from restructuring procedures started last year, because of their profitable performance. Exactly here effects now the strategy change in Dubai’s finance management: To inject new liquidity, gained from bonds, in sustain profitable projects!

The most important question for debtors is, how DW will handle now the 3.52bn $ NAKHEEL Sukuk, due with December 14th, 2009. Till now, there is only the intention for a moratorium, but it is still not agreed.

Neither DFSF, nor DW gave till now any statement about that problem case. Following the Sukuk prospectus, NAKHEEL could start negotiations to delay repayment by another month without causing a breach of contract. So or so, after December 14th there is a 14 days delay respite for payment, before bond holders are able to start legal action. Deutsche Bank London, the bond transaction manager, would be obliged to give notice to the bond holders after December 28th, 2009.

According to the prospectus, Deutsche Bank would invite in that case for an assembly of all certificate holders to discuss the further steps.

This looks easy at the first glance only: A quorum is only given, if more than 50% of the total Sukuk volume is represented in the assembly. An extraordinary resolution to take legal action against DW / NAKHEEL or to restructure the Sukuk requires 75% of the votes.

 
Are there historical precedents for such cases?

Not really. DW is on the one hand a government controlled company; on the other hand there are attributes of very normal private companies: a stock market listing (DP World), a credit rating (JAFZA) etc.

Maybe best comparison is given between the DW and the Eurotunnel crisis: End of 1990 and beginning of 2000 this infrastructure project came in financial problems due to excessive loan absorption. These problems have been handled by giving debtors equity rights.

B - Classification of the Relations

In the actual discussion, differentiation and consideration of relations are falling aside. This is logical, also and especially one year "after Lehman", and not an accusation: Too many have lost too much money during the last 14 months world wide - there is no chance to rule all now with deliberateness.

But a couple of days after the shock, maybe the following ideas could be considerable:

• Lehman was involved in global "balloon business", in Trillion volumes
• The Dubai crisis is local, eventually regional - and in the lower Billion volume
• The Emirate of Dubai is a county inside a federation. It has approx. 1.7mn inhabitants, which is similar to the gross area of Munich or half the size of Berlin in Germany
  (by the way: Berlin has in opposite to Dubai "just" 95bn $ debts)
• The federation of the UAE has got absolute and relative in comparison to its GDP a much more lower debt relation like as Germany or Japan for example, not to talk about the US
• In an absolute majority the usage of gained funds out of debt absorption happened and still happens in an invest focus - and not consumptive or for social expense, as it is fact with most of the European "debt kings". Means, here are standing asset values (however they might be valued actually) against the debt obligations, but not only social burden reduction for the individual
• Approx. 50bn $ wealth in Dubai’s 3 Sovereign Wealth Funds (SWF) only plus further enterprises, active assets, passive assets, property, deposits etc. in a volume of another estimated 300bn to 500bn $ are making Dubai in the actual crisis rumors definitely the most rich "Bankrupt" of all times

C - Regional Backing

Apart from Dubai’s wealth profile, the federation as well as the GCC council are playing a vital role, if it would need to come to safeguard action. Despite all regional and local differences: out of Arab solidarity, combined with a clear pragmatism in following own interest, it can definitely be stated, that any fear and kind of state bankruptcy of Dubai would be foiled by the UAE as well as its neighbor countries.

Which leads automatically to the question if these entities are also able to absorb such anti-bankruptcy efforts?

The following overview of the asset values of regional SWFs gives a clear answer without further explanation:

D - Understandably Overreaction

Considering: The moratorium is focused on payments, due the next 6 months, of accumulated maybe 12bn to 15bn $ - not more, not less. And the only known reason why Dubai won’t serve this volume on time - is because Dubai doesn’t want it (selective focusing on capital injections in strategic profit generating projects, see above). If it can be implicated by this that Dubai isn’t capable to serve it - frankly, we don’t know. But personally we don’t believe that it is a question of capability.

Also with view to collateral damage, things have to be sorted very clear:

70% of Dubai’s bank loans have been underwritten by European banks - among others by Deutsche Bank, LBBW, HSBC and Standard Chartered (for sure - much, much more).

These banks made - only by comparing the interest rates between Europe and GCC - great profits over the last years. Now they are in one boat with Dubai - "no risk no fun", shall we cry now? Without any malice: Dubai was for the banks a huge profit playground - same as for property investors.

After the outbreak of the financial crisis, two things can be postulated for Dubai: The role being a profit playground brought a lot of (not sustainable) growth - but indeed also a lot of headache. Maybe (expressively subjunctive!) this forced also a bit to show a „new face“.

Maybe Dubai itself became meanwhile tired or bored of being in a constant role of 1001 nights or boogey wonderland . . .

E - Dubai exposure of "western" Banks

As already stated, especially "western" Banks have "Dubai Exposure". Reviewing the following, it has also to be considered that the exposures are related to UAE in general without a segmentation of borrower classes. This is also important considering the role of all banks strongly involved into retail, private and business banking like HSBC, StanChar, RBS, Lloyds etc.

DowJones Newswire stated November 27th, 2009 about the exposure (summarized):

Following the analysts from Credit Suisse, the Middle East in total is with not more than 1% to 2% in the loan books of European banks. The Dubai focus is only a split out of this. Credit Suisse for itself sees no hassles with the actual situation in Dubai. Same statement from Deutsche Bank, which has no bigger exposure in that region.

Credit Agricole Investment Banking spoke about a "small exposure" in Dubai World. But they see no reason to worry.

According to Dealogic are among the banks with Dubai exposure: Credit Agricole, HSBC, Royal Bank of Scotland, Lloyds Banking, UBS, ING, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking. All-clear has been given by ING already. They are one of the "smaller lenders" in the 5.5bn $ loan facility. UBS published a statement, their engagement in Dubai would be "small and not material".

Lloyds chairman Win Bischoff explained, the small exposure in Dubai has no impact on shareholders or the own business.

 
"Dubai exposure" in several views

Japan - total approx. 1.16bn $, among that:

• 231mn $ by SMBC Sumito Mitsui Banking Corporation
• 693mn $ by Bank of Tokyo-Mitsubishi UFJ
• 116mn $ by Mizuho Corporate Bank
• 120mn $ by other, smaller institutes

 
US - total approx. 9bn $, among that:

• 1.9bn $ by Citigroup USA
• 1.5bn $ by Bank of America
• 1.5bn $ by J.P. Morgan Chase

 
Europe - total approx. 40bn $, among that:

• 15.9bn $ by HSBC Holdings PLC
  (1.7% of group loan book, against that 19.3bn $ deposits in UAE)
• 7.8bn $ by Standard Chartered
  (7% of group loan book)
• 3.6bn $ by Barclays Bank
  (below 1% of group loan book)
• 2.2bn $ by RBS Royal Bank of Scotland / ABN Amro
  (below 1% of group loan book)
• 1.7bn $ by BNP Paribas
• 1.6bn $ by Lloyds Banking Group PLC
  (below 1% of group loan book)
• 1.5bn $ by Credit Agricole SA
• 1.4bn $ by ING Banking Group
• 1.4bn $ by Deutsche Bank
  (no DW exposure)
• 1.0bn $ by LBBW

Sources: Nikkei Business Daily, Credit Suisse, Emirates Bank Association, own research

Details from several banks are still missing; we expect further details the coming days. Especially some German State Banks (government) announced last Friday, first of al to check now, how far their lendings are to DW or maybe other Dubai firms (smirk, something typical for those kind of banks in Germany - they never know where their money is).

 
Local and regional "Dubai exposure"

Here data collection is definitely thickened. Reason is on one hand the traditionally more limited information policy of Arab banks - but most probably reasons are the running holidays here: Eid Al Adha from last Thursday till Sunday as well as National Day holidays from coming Wednesday till Saturday inclusive.

At least, "Dubai exposure" of actually by media reports named local and regional banks looks modest:

• 1.9bn $ - ADBC Abu Dhabi Commercial Bank
• 345mn $ - NBAD National Bank of Abu Dhabi
  
• NN $ - First Gulf Bank (Dementi 30.11.09 - "incorrect & absolutely overstated")
  

F - Banking Sector in the UAE

Last week’s rating write offs for four Dubai based banks, executed by Standard & Poor’s (S&P), sound more worst as they might be:

• EIB Emirates International Bank -  A-
• Emirates National Bank of Dubai -  A-
• Mashreq Bank: -  A-
• DIB Dubai Islamic Bank: -  BBB+

UAE’s banking sector looks - especially in comparison to overseas banks - regarding the usual parameters very healthy, which can also be evaluated with deeper interest by studying the following publications from Emirates Bank Association (EBA):

Annual Report 2008 - Commercial Banks
Annual Report 2008 - National Banks
Annual Report 2008 - Islamic National Banks
Annual Report 2008 - Foreign Banks

 
Deposit Protection by UAE Central Bank

As a matter of fact - with view to the very high deposit statistics from EBA and along with the actual rating declass - the question comes up, how secure are the deposits with the various banks registered in UAE?

Generally and as per the law:

Deposits from clients with banks registered in the UAE are latest since May 19th, 2009, guaranteed by the government for a period of 3 years.

This warranty is actually issued till December 31st, 2012. It covers all national banks as well as subsidiaries of foreign banks - and also deposits from overseas clients.

It has to be stressed that even before May 2009 the government issued a liquidity guarantee for UAE banks, but not that explicit towards each single customer declared deposit protection like now.

This "new" deposit protection is unlimited in amounts, which is a huge difference with view to European deposit protection which is in most countries limited in amounts (Germany 20k Euros for example).

Dubai, 30.11.2009