First with Financial Comment from Arabia

First-ever $20bn Abu Dhabi bonds to help bailout Dubai

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Abu Dhabi is preparing investor presentations for an upcoming maiden bond issue for as much as $20 billion, according to a report from Thomson Reuters yesterday.

It said JP Morgan, Citibank and Standard Chartered are working with the Abu Dhabi debt management office on the issue but no date has been set. Abu Dhabi requires debt finance both for its ongoing construction program and to assist Dubai in its debt restructuring process.

Dubai debt details

More details continue to emerge about the extent of the Dubai debt problem from the latest report from the International Monetary Fund.

Morgan Stanley told its clients that it reckons the bilateral debts of Dubai government related companies amount to between $10 billion and $20 billion, while the new total for syndicated debt from the IMF is $109 billion. This brings the total Dubai Inc debt to a maximum of $129 billion.

Then The National newspaper cites a study from UBS that notes Dubai Inc will not to want to leave half-built projects. UBS estimates another $60 billion is required to foot this bill. Total liabilities then top $189 billion.

And who is owed this money? UBS points out that the biggest liabilities are with Dubai banks which are owned at least in part by Dubai Inc. Thus the idea that the Dubai Government can somehow shed its liabilities is seriously compromised.

As UBS concludes: ‘Such a large ownership share by domestic financial institutions, the largest of which are majority-controlled by the government, may make it easier to reach majority-based consensual agreement, which reduces the risk of involuntary debt restructuring or outright default’.

On the other hand, it makes a recapitalization of the local banking sector look more and more likely, and perhaps at least part of the money from the first-ever Abu Dhabi sovereign debt issue will have to go into the local banking sector.

UAE resolution

However, as a visiting banker from JP Morgan told ArabianMoney yesterday the debt problems of the UAE are actually among the simplest in the world to understand and resolve. They are debts against investment projects that have gone wrong, not runaway government budget deficits.

Things are becoming clearer and more transparent, and the IMF report is a major contribution to identifying the scale of the problem. Yet even with the wealth of Abu Dhabi this is a tricky circle to square.

Abu Dhabi raising money on its good credit to bailout Dubai, whose international credit standing is among the lowest in the world right now, would likely be a contribution to the final solution, although all this is still speculation at this stage.


Written by Peter Cooper

March 3, 2010 at 8:44 am

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