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Dubai credit improves as the dust settles on the bust

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News that Dubai sovereign wealth fund Dubai International Capital has secured a loan of $550 million over two years from a syndicate of lenders is a sign that the credit freeze is over for the indebted emirate.

But Dubai is going to need fresh credit. Analysts speaking to The National cited debts of $6.8 billion to be repaid by the end of the year, $10.1 billion for 2010, $$12.1 billion in 2011, $15.2 billion in 2012 and $4.8 billion in 2013.

That looks a recipe for a three-year spending and investment squeeze in the once rapidly growing city, now strewn with abandoned construction sites. But it is true as Emaar chief Mohamed Alabar said on CNN TV that most of Dubai’s debt is secured against commercial entities.

Liquid cash-flow

Dubai Holding, of which DIC is a subsidiary is highly liquid and should not have any problem servicing its debt. But the repayment or refinancing of upcoming annual debts clearly is an issue for the whole of Dubai Inc.

The biggest concentration of debt is in Dubai World, the ports operator that expanded into palm island real estate developments. It subsidiaries, including realtor Nakheel, owe $18.8 billion and the group a further $5.5 billion.

There has been no sign of rumored debt-for-equity swaps. Quite apart from the difficulty of agreeing a valuation of equity in a global recession, Dubai is probably not keen to dispose of assets that it thinks will be valuable in the future for the sake of saving interest payments, which if successfully refinanced could be kept low and serviceable.

If it were after equity injections then the approach by Abraaj Capital to buy a $1 billion stake in DP World would not have been rejected. Indeed, Dubai is probably not short of offers from private equity and other sovereigns that would like to pick up its prime assets on the cheap.

Challenging times

However, it is going to demand all of Dubai’s customary nerve and commercial saavy to get itself out of the debt mountain left over from the recently collapsed boom.

The public sector is only one side of the debt problem. Local corporates have also run up big debts during the good times, not least in playing their part in the property boom. Then there are countless individuals who jumped into the property market at the wrong time, and a trail of late invoices and delayed payments stretching to the moon.

Yet local confidence surveys like the one from HSBC this week show a resilient business community, although this might be interpreted as a bounce off a summer bottom. It is early days but the Dubai credit position is improving but it badly needs too.

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Written by Peter Cooper

October 22, 2009 at 10:30 am

One Response

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  1. “News that Dubai sovereign wealth fund Dubai International Capital has secured a loan of $550 million over two years from a syndicate of lenders is a sign that the credit freeze is over for the indebted emirate.”

    I’d hardly classify a $550 million loan to be a signal of ‘the end of the credit freeze’. I think a better indication of that would be coming up with $6.8 billion in the next 2.5 months.

    Tom

    October 22, 2009 at 7:22 pm


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