First with Financial Comment from Arabia

Junk status for the rest of Dubai debt says S&P

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Credit rating agency Standard & Poor’s has slashed the rating of Dubai government-linked companies to junk status, which makes it much more expensive for them to raise funds.

This is the continuing fall-out from the Dubai World debt suspension announced last week which S&P says ‘is considered a default’, although the agency does not rate Nakheel, Limitless nor their parent Dubai World.

Junk ratings

The companies whose debt is now rated as junk are: DP World, DIFC Investments, Jebel Ali Free Zone, Dubai Multi Commodities Centre Authority, Dubai Holding Commercial Operations Group and Emaar Properties.

S&P justified the move saying that ‘the likelihood of extraordinary support from the Dubai government appeared “low” after the emirate indicated it would not guarantee the debt of Dubai World, its flagship conglomerate’.

The agency added: ‘As evidenced in the case of Dubai World and Nakheel, the Dubai government is either unable or unwilling, or both, to provide extraordinary government support in the form of timely and sufficient financial support to those of its GREs that provide essential government services on its behalf’.

It might seem wrong to deny funds to a profitable global port operator like DP World or to Emaar Properties, which is only 32 per cent government owned, but this is a function of how markets respond to non-payment of debts by state-owned companies.

The market assumes an implicit government guarantee and when it does not get one then the credit-worthiness of all government-related companies suffers.

Commercial calculation

This is doubtless part of the commercial calculation that the Dubai Government will have made in consultation with its advisers Rothschild. Not throwing good money after bad in the case of supporting Nakheel and Limitless was seen as more important than safeguarding credit lines for other government companies, or perhaps there was just no other alternative.

Clearly it is going to be challenging for Emirates Airline to continue to finance its $50 billion aircraft order book in this environment, though it has recently had recourse to the Ex-Im Bank which carries a US government guarantee.

To raise money in future Dubai is going to have to rely on Abu Dhabi, where the $5 billion bond sale just before the crisis last week is a reminder that Dubai’s credit is still good in Abu Dhabi, and asset sales which will be difficult in current global markets.


Written by Peter Cooper

December 3, 2009 at 9:53 am

One Response

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  1. Peter,

    Sorry to drop this into the comments section I had hoped to e-mail you directly. Have you heard anything regarding this excerpt from Jim Willies “Hat Trick” letter.

    “The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial cogs, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans.

    These people will remain prisoners, and will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before being trapped in homes.”

    Granted, Mr. Willie can be somewhat hyperbolic at times but I can’t see the reason in posting this statement if there wasn’t some truth to it!

    Any insight that you have is appreciated.


    Ed Note: Now there might be an inkling of truth in some of this but the substantive is complete and utter nonsense. The airport cars, for example, is a great story, the reality is that perhaps a dozen or so cars have been dumped at the airport – hundreds is in fact less than the original misreporting of thousands.

    As for the ‘prisoners’ again this is unjustified hyperbole. Yes there certainly are people stuck here sorting out bad loans – and if they have issued bad checks they might also be in prison, just as you would be for forging a signature on a check in the US or UK. You can not expect just to walk out on your business contracts just because you come from a major economy.

    But the general tone of this comment is one of anti-Arab prejudice. These are emerging markets and those from developed markets who operate here as it they are still at home have made a foolish mistake, and now have to face up to their mistakes.

    However, newsletter writers should get their facts straight and when they are wrong it calls into question their other ‘facts’ and judgements. Mr Willies recent rant about the gold ETF comes to mind. Why if GLD is so bad is one of the world’s brightest hedge funds its main holder? (John Paulson who got US subprime right and made $3.5bn)


    December 4, 2009 at 8:52 pm

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