Moody’s report increases Dubai debt concerns

6th December 2011

Dubai was then in the depths of a debt crisis – its mix of state-owned and state-sponsored companies needed to refinance some $20bn in debt. It could not find the cash from its own resources – these had been stretched in grandiose projects such as artificial islands and hotels of ever increasing luxury plus what turned out to be an unsustainable property boom.  The emirate, which is low on natural resources such as oil or gas, was forced to go up the road to petroleum rich Abu Dhabi for a bailout.

Now a new Moody's report on Dubai raises further concerns for investors – even if the big fear factors remain in the eurozone.

For two years after the 2009 crisis, Dubai and its debts are back on the agenda, although trumped for headline space by the eurozone's seemingly interminable death (or rebirth) throes.

And they are big. It can be hard to compare debts between countries especially when they have different cultural and financial set-ups. Dubai has a population of some 2 million although only some 400,000 are citizens, the rest immigrants ranging from street sweepers to stockbrokers.  However based on 2 million, Dubai with debt of just over $100bn has levels per head comparable with Greece.

Now it needs to pay interest on the emergency help of late 2009 – $3.8bn, according to sources. And it will have to find another $10bn shortly to meet bond maturities. Dubai-based companies have fallen sharply on Middle East stock markets on a mix of fear of refinancing costs – now made greater by the eurozone crisis and potential ratings downgrades. 

If Standard & Poor's does reduce the triple-A ratings for the six strongest eurozone members – including Germany, Austria and France – that would have a knock-on effect on other sovereign or semi-sovereign debt elsewhere as interest rates globally would be ratcheted up.

Moody's says "it has seen "few signs" that the Dubai firms with weaker credit profiles are taking steps to cut debt and move to "more sustainable capital structures." This raises concern that Dubai might need further financial support, the ratings company added.

While Dubai-based financial and government institutions are confident that new bonds can be issued at reasonable rates to meet the immediate cash bill, and that arrangements can be made with bond holders, there are investor fears of contagion across the whole emerging market debt scene. State-controlled companies including Dubai Holding LLC and Drydocks World LLC remain in restructuring talks with bondholders although property company Dubai World reached a $25bn agreement with debt holders in March.

The Moody's report warns against a bond refinancing that disguises an effective default as this would, the agency says, damage fragile investor confidence in Dubai and its ability to fund core activities.

Moody's says that three major Dubai enterprises –  Dubai Holding Commercial Operations Group, which has a $500m bond due in February; Dubai International Financial Centre Investments with a $1.25bn Islamic bond due in June; and the Jebel Ali Free Zone, a unit of Dubai World, with a $2bn Islamic bond due next November – remain on high default risk watch.

The MSCI Emerging Markets Index (MXEF) slumped 1.1 percent today.

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