ArabianMoney.Net

First with Financial Comment from Arabia

Emirates and Eithad debut in Tokyo and BA goes on strike again

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When the history of aviation is written in future years time this week will be remembered as the one in which Emirates Airline and Etihad opened their first-ever flights to Tokyo while British Airway cabin staff went on strike for a second time.

Cabin crew from Lufthansa and Alitalia are also planning strike action as the legacy carriers from Europe embark on what any business observer would have to acknowledge as suicide during the worst global economic downturn since the 1930s.

Tokyo debut

Abu Dhabi’s airline Etihad will operate five non-stop flights to Tokyo a week. The maiden Etihad flight arrived a day ahead of Dubai’s Emirates first flight into Tokyo’s Narita airport that will also offer five flights per week.

Direct flights from the two major cities of the UAE to Japan means the start of a whole new hub service for the Japanese capital routed through the UAE. There is also the associated prestige and publicity attendant on direct flight services.

Trade and trading relationships between the UAE and the world’s second largest economy are strong with $29 billion in trade annually. There are some 350 Japanese companies and 3,500 Japanese expatriates living in the UAE which is a hub for multinational distribution in the region.

Both airlines are also hoping to attract more high-spending Japanese tourists to visit Dubai and Abu Dhabi that have an impressive inventory of new luxury hotels and shopping malls as well as new cultural attractions.

What a contrast with the European airlines whose staff see themselves as royalty flying the world to indulge in long-stop overs with their friends also flown in at subsidized rates.

Younger staff

The future clearly lies with the Gulf carriers with more market orientated employment policies. That means giving young staff short contracts, and investing in modern aircraft rather than staff perks.

It also means getting on with expanding the airlines across the globe and not allowing customers to be upset by strike action by cabin staff who seem to have forgotten that they are only their to serve the airline and not vice-versa.

European legacy airlines have a tough enough job ahead of them competing in a globalized aviation market without their staff stabbing them in the back.

Written by Peter Cooper

March 29, 2010 at 7:56 am

Posted in Aviation, Hotels, Travel

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

Calm before the storm in global financial markets again?

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The calm always comes before the storm. In world financial markets the bears are tired of calling an end to the year-long rally, while even the bulls are beginning to feel that they are skating on thin ice.

The US treasury market weakened on a poor auction result last week. That might be seen as bullish for equities as an alternative asset class but then higher interest rates are the writing-on-the-wall for global asset prices. Rates go up and asset prices go down.

Bull dilemma

Indeed, this is the whole problem for the bulls. They know that a bubble is being inflated in stock prices by low interest rates. Traders say this is all down to after hours trading by the big banks. Volumes are light and trading thin.

So why would you wade in and commit fresh funds in such an environment? The potential downside is that new money. The potential upside is a few percentage points on the Dow. Treasuries at four per cent might look more attractive, except that the capital at risk is also a factor there.

The result is something of a stalemate with not much happening. Shorts have been almost all covered in a long rally. Nobody really wants to take on the bulls. But then nobody wants to run with them either.

Judging which way the market might turn next is surely not difficult. The bulls are running out of steam while the bears are resting. And given just how far this market appears to be manipulated it will have to be the bank trading desks who decide to put on their short positions and catch the rest of the market snoozing.

Market timing

How long will that take? If only we knew. But being positioned away from a crash is more sensible than being in the middle of it, unless you go short too.

Realistically this should not take too much longer. We know from past crashes like the one seen in 2008-9 that a rally is followed by a sharp correction, and the longer the rally the sharper should be the correction.

When the bank trading desks have killed every short then they will go short and kill the bulls. It will not be a pretty sight.

Written by Peter Cooper

March 28, 2010 at 9:32 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

Hotel Review: Desert Islands, Sir Bani Yas Island, Abu Dhabi

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Once the UAE ruler’s own private game reserve, the Sir Bani Yas Island about 200 kilometres to the south-west of Abu Dhabi has been skillfully transformed into a major tourist attraction with the opening of the Desert Islands Resort and Spa by Anantara last October.

In the 1970s Sheikh Zayed bin Sultan Al Nahyan first decided to turn this barren island off the UAE coast into a green playground for thousands of animals, including the rare Arabian oryx. He planted more than two million trees and even irrigated a mountain in the centre of the island, turning it green.

Wildlife park

After his death it was decided to open this unique ecological experiment to visitors. It is a remarkable combination, part bush land, part zoo. There are thousands of gazelles, numerous species of deer, several hundred oryx, 40 giraffes, hyenas, eight cheetahs and a whole host of smaller birds and animals.

For the best sightings guests are conveyed in safari vehicles for a 7am drive. The island is also ideally suited for activities like kayaking, snorkeling and mountain bike riding, all included in the room rate at the excellent Desert Islands Resort and Spa complex.

This brand new hotel is built to the highest five-star standards with 68 rooms and six villas. Rooms are very spacious with all the usual luxury features and fine bathrooms. They also have private terraces and access to the swimming pool at ground level.

Service is very good at this boutique hotel and staff are soon addressing you by name. The pool area is beautifully arranged for privacy and relaxation with a substantial bar and restaurant, although the beachfront is presently cut-off by huge concrete breakwaters that will be partly removed in the future.

Great food

A second restaurant flows from the hotel interior onto a large ground floor terrace, and is pleasantly shaded. This restaurant offers a wide range of international cuisine both a la carte and from a buffet. Barbecues on the terrace are a specialty and very popular.

The hotel attracts quite a lot of local visitors from Abu Dhabi, who particularly like the lavish spa with its sea views from the treatment rooms; the double room even has a jacuzzi on the terrace. For the energetic there is a huge gym and tennis courts.

If you are coming from Dubai then the drive is over three hours and it probably makes sense to stay three rather than two nights. Fortunately at the moment the hotel is offering a three nights for the price of two package with buffet dinner and two activities. You can also fly from Abu Dhabi.

Written by Peter Cooper

March 28, 2010 at 8:09 am

Posted in Hotels, Restaurants, Travel

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

$9.5bn in new funds but months to close $26bn Dubai debt deal

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The Dubai Government is to provide up to $9.5 billion in new funds as a part of the final rescheduling deal for the $26 billion debt mountain at Dubai World’s real estate companies Nakheel and Limitless. But closing this deal is likely to take several months.

A government statement issued on Thursday morning said: ‘The government of Dubai, acting through the Dubai Financial Support Fund, will support these proposals with significant financial resources, including a commitment to fund up to $9.5 billion in new funding over the business plan period.

‘This will be funded by $5.7 billion remaining from the loan previously made available from the government of Abu Dhabi and from internal Dubai government resources. The restructuring process is expected to take several months to implement. The tribunal process remains available to protect the companies, their creditors and other stakeholders.’

Debt crisis

Last November Dubai World sent world financial markets into a frenzy with news that it was going to delay paying all its loans until this May. Since then there has been constant speculation about the status of talks with rumors about debt haircuts and guarantees from the Dubai Government.

Today’s statement provides a partial solution as it becomes clear that new funds are to be made available from Dubai Government to alleviate the debt mountain. The Dubai Financial Market immediately surged on the news which goes some way to relieving the uncertainty that has hung over the market since last November.

However, the devil will be in the detail of the deal which is still someway off. There will also be some further reflection on the true value of the total debt outstanding in Dubai. The local magazine Gulf Business recently published table of bonds and loans showing $6.6 billion due this year, $24.6 billion in 2011, $12.4 billion in 2012 and $16.9 billion in 2013.

Short-dated loans

This is indeed the problem for Dubai. Its debt carries such short maturities. So while the Dubai World debt rescheduling is the biggest debt issue, it is by no means the only debt to be repaid on the horizon.

Thus while the news today is progress indeed, and will be a big relief to bankers who feared a far worse outcome, this is still an opening chapter in winding up an enormous loan book.

What clearly needs to happen is for much of this bank debt to be replaced by long-term bonds issued at rates of interest that Dubai can comfortably pay. One way or another that will happen.

Key proposals

Meanwhile, the auditors responsible for restructuring Dubai World issued the following statement outlining the key principles for the deal:

‘The total amount of outstanding debt held by Dubai World’s creditors, excluding the existing Dubai Financial Support Fund’s claims, is $14.2 billion as at 31 December 2009.

‘The Government of Dubai acting through the DFSF is proposing to convert $8.9 billion of debt and claims, representing 38 percent of the total amount of standalone debt and guarantees of Dubai World, into equity, subordinating its claims to other creditors.

‘In addition the DFSF will commit to fund up to $1.5 billion of cash into Dubai World to fund the Company’s working capital and interest payment commitments that will arise from the new debt facilities.

‘Non-DFSF creditors will receive 100% principal repayment through the issuance of two tranches of new debt with five and eight year maturities.

‘Dubai World has a number of strong companies within its portfolio and it will continue to focus on improving the performance of these assets to generate value for stakeholders. The Tribunal framework, established by the Government of Dubai in December 2009, remains available to protect Dubai World and its companies, their creditors and other stakeholders.

‘A restructuring plan regarding Nakheel, the other entity affected by the restructuring programme initiated by the Government of Dubai on 25 November 2009, has also been presented to Nakheel’s creditors and is covered in a separate statement today.

After careful review, Limitless has also been excluded as it does not require Government support. All other Dubai World entities continue to be excluded from the restructuring process.’

Written by Peter Cooper

March 25, 2010 at 10:50 am