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Abu Dhabi and Dubai bourse merger would boost UAE recovery

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It has long been an anomaly that a relatively small country like the UAE has three stock markets – the Abu Dhabi Securities Exchange, Dubai Financial Market and Nasdaq Dubai – and the logic for consolidation is overwhelming.

Now with the merger between the Nasdaq Dubai and Dubai Financial Market in its ‘very final’ stages, according to officials, there have also been talks about making this a three-way merger.

Government decision

This is clearly a decision to come from the government level. The ADX is 100 per cent government owned and the DFM has only listed 20 per cent of its stock. In December the DFM announced an agreement to buy Nasdaq OMX’s remaining stake in the Nasdaq Dubai in a $121 million deal.

The merger of the Nasdaq Dubai and DFM is actually more complicated than merging with the ADX from a regulatory standpoint as the two Dubai exchanges have different regulators, the Emirates Securities and Commodities Authority for the DFM and the Dubai Financial Services Authority for the Nasdaq Dubai.

Nasdaq Dubai stocks are also quoted in dollars and not the local UAE currency the dirham. After the merger Nasdaq Dubai listed companies will have a choice over whether to trade in both currencies, although the fixed peg to the dollar effectively makes the dirham a dollar proxy in any case.

UAE bourse a big step

But the creation of a unified UAE stock market is a far more important step. It would mark a decisive breach with the past and the disappointing performance of UAE bourses since their crash of late 2005. There would be a sense of a new start, and a start from a low point.

This would also be more than a symbol of the new unity of purpose in the UAE since the savage credit crunch first struck in autumn 2008 and the country dipped into recession last year for the first time in more than a decade.

For global investors a unified UAE stock market would look far more attractive. It would be a deeper and more liquid market. The potential for initial public offerings would be considerable. And this flow of funds into equities would assist the nation in a rapid recovery from last year’s recession.

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Written by Peter Cooper

March 31, 2010 at 10:24 am

Three days official mourning after tragic death of ADIA boss

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Mortality is the biggest enemy of all investors and the managing director of the Abu Dhabi Investment Authority, Sheikh Ahmad bin Zayed Al Nahyan who died in a tragic glider accident last Friday, was arguably the greatest investor of all time with the world’s largest sovereign wealth fund under his control.

A five day search ended yesterday with an announcement from the Emirates news agency WAM that divers had discovered his body in the lake south of Rabat in Morocco where his glider crashed. Flags will be kept at half mast across the UAE but there will be no closure of government offices.

Sheikh Ahmad was a younger brother of the UAE President Sheikh Khalifa bin Zayed Al Nahyan, and listed by Forbes magazine as the 27th most powerful man in the world.

His recent efforts to increase the transparency and openness of the formerly secretive ADIA had been widely praised (see this article) and his death at just 41 years old is a major loss to the nation.

Written by Peter Cooper

March 31, 2010 at 8:19 am

Posted in Banking, UAE Stocks

Nakheel board sacked as debt rescheduling talks continue

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The Government of Dubai has sacked the entire board of Nakheel, the developer of the Palm islands trilogy and other ambitious real estate developments, whose $24.8 billion debt mountain is now the subject of intense restructuring negotiations.

Nakheel chairman Sultan Ahmed bin Sulayem has been replaced by Mashreqbank vice-chairman, Ali Rashid Lootah. Other new board members appointed yesterday include Khalid Mohammad Salim Bakheit, Khalil Eisa Ahmed Awad, Adel Khalifa Al Shaer and Ebrahim Hussain Al Fardan.

O’Donnell dismissed

CEO Chris O’Donnell was also dismissed from the board, and his position is now subject to the approval of the new board. No CEO could continue without the support of a new board.

The dismissal of the old Nakheel board was not unexpected in the wake of the proposal made to reschedule the group’s $24.8 billion debts last week. Indeed, the banks were bound to insist on new board, management team and business plan for Nakheel before they agree to the new terms.

The banks will want no confusion as to what the loans are for, or who is in charge of fulfilling this plan. So far the indications from banking sources over their reaction to last week’s rescheduling proposal has been mixed, with some banks concerned about the unequal treatment of Nakheel bond and loan creditors.

Business plan

Solid proposals for the future of Nakheel, of which changing the board is a first step, are likely to go a long way to convincing the banks that the proposals are worth supporting.

Aidan Birkett, the chief restructuring officer or administrator, has said the new debt deal will put Nakheel on ‘a stable financial footing’. But the banks will hardly be writing blank checks for Dubai to pursue more mega projects with their money. A solid business plan is needed, most likely with management not associated with the previous excesses.

It is not clear if the banks will be able to reach a settlement before the next $980 million Nakheel bond that falls due on May 13 or whether Dubai will again have to dip into the funds it received from Abu Dhabi to pay this debt.

Some more news on management structure and business strategy might speed things up.

Written by Peter Cooper

March 31, 2010 at 7:56 am

Abu Dhabi non-oil imports down 10% in January

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New official trade figures showed that non-oil imports into the UAE capital declined by 10 per cent in January to $10 billion, confirming that even Abu Dhabi is feeling the impact of the global economic slowdown.

Total non-oil foreign trade in January declined by a lesser four per cent to $15 billion as exports and re-exports actually grew by 21 per cent while imports declined.

Rebalancing trade

Acting director general of the Federal Customs Authority Khalid Ali Al Bustani told Gulf News that this represented an ‘improvement in the balance of trade between the UAE and the outside world during the reviewed period’ and ‘highlights the growing competitiveness of UAE exports despite the repercussions of the global financial crisis’.

However, it is also undoubtedly true that the big drop in imports is also due to a slowdown in real estate and construction in Abu Dhabi, and falling consumer demand for big ticket items like automobiles.

It is something of a myth that Abu Dhabi has not been impacted by the global financial crisis. In particular the sudden stop and real estate crash in neighboring Dubai has impacted private sector construction projects. Credit has become more difficult, and off-plan property sales have dried up.

Not that the Abu Dhabi Government has slowed its expansion program. It is mainly the private sector that is feeling the downturn, although government hotels have seen revenues fall from the boom times.

Oil revenues

The big question for this year will be how oil revenues hold up in Abu Dhabi. Last year saw a swift recovery in prices. There is the possibility of a double dip recession this year that would hit oil revenues again.

All the same, Abu Dhabi has huge reserves in its sovereign wealth funds and is one of the few nations of the world to have ample savings for a rainy day. It can also draw down funds to invest when other nations are unable to do so and when asset prices are down.

So whatever the trade figures tell us, and they are a reminder that Abu Dhabi is also a part of a globalized world, there is little cause for concern, unless you are an importer.

Written by Peter Cooper

March 29, 2010 at 8:29 am

Jewelry shops to close in $870m Damas debt standstill deal

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Damas, the largest jewelry chain in the Middle East is to close or relocate some of its 450 outlets as a part of a $870 million debt restructuring deal that follows in the wake of a record $3.7 million fine for violating corporate governance standards last week.

Yesterday a majority of the group’s banks agreed to a standstill agreement and officials said a restructuring plan would be implemented at the end of the standstill agreement period. They had previously announced in December that this would involve the closure of some of their 450 retail outlets.

Corporate governance

Last week the Dubai Financial Services Authority ordered the dismissal of the Damac board and fined the family owners for violations of corporate governance that amounted to treating the publicly quoted company like a private concern.

The Abdullah bothers, Tawhid, Tamjid and Tawfique have been ordered to repay $99 million and two tonnes of gold that were taken for personal use and property investments.

The Damas scandal is one of many that has rocked Dubai business since the collapse of the real estate boom 18 months ago. Many business arrangements that might never have surfaced have been exposed as lacking in proper corporate governance and are now the source of much embarrassment and public ridicule.

Entrepreneurs who skate on thin ice and make it, are usually regarded as heros. Those who fall through and have to be rescued are seen as national liabilities.

Merchant traders

Yet where would Dubai be today without its merchant families, whatever their trading practices? It is actually men like the Abdullah brothers who built Dubai, and most recently they have devoted an enormous amount of time and effort to the highly successful creation of the Dubai Multi Commodities Centre.

That is not to say that wrong has not been done, merely to note that entrepreneurs are rule benders by nature and that their value to a society amounts to much more than some of the people now passing judgment on them.

For where does the wealth of a city like Dubai come from if not its merchant families? If this inconvenient truth is forgotten then Dubai really does have a problem. It is very sad to see Damas closing and not opening jewelry shops.

Written by Peter Cooper

March 29, 2010 at 7:31 am

Bankruptcies and liquidations still likely in Dubai real estate

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Last week’s government rescue plan for its wholly-owned property group Nakheel should not obscure the fact that Dubai still faces a difficult recovery from its 18 month old real estate crash.

To date their have been no large bankruptcies or liquidations, and only a few properties have been repossessed by the banks. As in the rest of the world the local banks have been highly supportive of their clients in this crisis. But this is not a situation that can last indefinitely, globally or locally.

Bankruptcy

Put at its most simple there is always a point at which a client must go bankrupt. If they are hopelessly trapped with no way of ever repaying a loan then all that happens as time goes on is that the amount owed gets bigger and bigger as interest is not paid.

Consider the position of some of the developers of Dubai skyscrapers. They funded these projects with a mixture of off-plan sales and bank debt. Sales dried up. Bank credit ended with the crisis. The contractor walked off. So they have a half-finished tower, no money and no contractor.

What are they going to do? Well there is not much they can do, it is up to their banks to say ‘hold on, how are we ever going to get our money back?’ That can only happen if the project is liquidated and the assets sold for whatever they will realize in the market place. Even providing money to finish the project might just end up funding an empty building with even more debt.

Now banks are not stupid, whatever their recent lending practices might suggest. They will always try to delay a liquidation until the sale will at least recover what they have loaned. They are not that interested in whether anything is left for other parties.

Calling in loans

So the moment the banks can sense a market upturn they are likely to pull the plug and call in the loans from Dubai developers. It does not need a great deal of imagination – just by looking around Dubai at the number of stalled projects – to realize that this is a big problem.

However, it is very hard to see how it could be addressed without a substantial number of bankruptcies and liquidations. The government can summon up enough capital and rally the support of banks to save Nakheel, but can it really do the same for all the other developers now in trouble?

Sure it makes sense to cushion the blow and make this as orderly a process as it can be. But market forces will sort out the aftermath of a real estate crash far more effectively than a wider government support program, which is probably just not practical in any case.

Written by Peter Cooper

March 28, 2010 at 8:37 am

Will the Nakheel deal really revive Dubai real estate?

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It is perhaps a little premature to reflect on what the proposed deal for the $23.5 billion Nakheel debt means for the Dubai real estate sector. The $9.5 billion cancelling of debt by Dubai Government goes a long way towards a solution but the devil is always in the detail and the banks have not signed yet.

However, two things have become much clearer. First, Nakheel is to continue as an independent and completely recapitalized company, if the deal goes ahead. Secondly, there is an intention to continue with Nakheel development projects, albeit almost certainly more slowly than previously planned.

Thus for existing Nakheel property owners, and there are already many thousands, a blight is lifted from their real estate. The future of the development company that is still responsible for community maintenance is now assured, although Nakheel community charges are still notoriously high compared to other developers.

Off-plan rescue

For those caught up in the numerous off-plan projects that Nakheel abruptly halted 18 months ago, actually a long time before the rescheduling declaration last November, there is new hope for solutions. These will clearly take time to put together on a case-by-case basis but an end to this nightmare is in sight.

However, the idea that Dubai will instantly revert to the boom times of 2007-8 should be immediately dismissed, and that is no bad thing either. That is just not going to happen. There is simply too much upcoming inventory, and bailing out Nakheel only adds to the supply chain.

For contractors who now get paid this is clearly a relief from a desperate situation, but it is not going to be back to business as it used to be. Indeed, the contractors themselves will be a bit wary of Nakheel after its recent problems.

Bank leverage

It is to be hoped that the banks are insistent on seeing a clear business plan and management reorganization as a part of their agreement to the new loan deal. That will mean that professional management is in place and that business is done on a solid and sustainable basis and not another boom-to-bust cycle.

For part two of the renaissance of Nakheel has to be the emergence of a very different company with a focus on customer service and project delivery and not endless off-plan mega projects of what we have now seen to be very questionable economic value. Then confidence will return to Nakheel.

Does saving Nakheel go a long way to solving the problems of Dubai real estate? Not really because the main problem is oversupply, and saving Nakheel adds to that upcoming supply. But in so far as this marks a major step forward in sorting out the Dubai debt mountain it is the beginning of the end to Dubai’s real estate crash.

The local stock market jumped 4.3 per cent on the news of the debt proposal. But that was less than half of the fall when the debt standstill was announced. This is about right. A lot is still to be done to sort out the Dubai real estate sector.

Written by Peter Cooper

March 27, 2010 at 10:47 am