Saturday, November 28, 2009

Fallout of Dubai's 'Desert Storm' Credit Disaster

The impact has been massive like a tsunami to world's bourses. All news channels have something to tell on Dubai's debt shocker. CNN has been airing analysis and comments.

I remember one of my formers bosses (Harvard grad) mentioned that he had thrown away his Harvard business books as they were no longer applied or relevant for Dubai's development model at that particular pace.

He was one of the fast rising executives whom was speedily promoted to head a big conglomerate and later, somehow, never heard of again. I have some fond memories working under him for his Malaysian connection and his brash style as well as empowerment to the subordinates.

It is the bottom line that always relevant to any commercial developments and business ventures. The moment of truth is here, now and for the future to re-assess Dubai phenomenon.

As it is now, enjoy the massive publicity all over the world for a place called Dubai.

Assessing fallout of Dubai’s credit disaster
John Sfakianakis

RIYADH: Concerns about Dubai’s potentially crippling default on enormous debts to global creditors have rattled investor confidence across the oil-exporting Gulf region, prompting corporate issuers in the region to postpone or cancel bond issuances (e.g. Gulf Investment Bank) in the wake of the news.

We estimate Dubai’s debt upward of $80 billion. At the heart of the issue is whether state-run Dubai World, which holds more than $50 billion in liabilities, will be able to pay back its creditors. The conglomerate that runs flagship Dubai companies such as DP World, asked banks this week for a “standstill” agreement as it negotiates to extend maturities of debt, including the $3.52 billion in Islamic bonds due next month from Nakheel, the famed palm tree island developer. The bond at the center of Dubai’s restructuring efforts, the December 2009 Islamic bond from Nakheel, has lost a third of its value since the announcement, the price having collapsed to 72 points from 111 beforehand.

Dubai’s announcement, which happened on Wednesday, sent shockwaves through European equity markets on fears that many banks could face massive writedowns on Dubai debt. Currency and bond markets across the globe were also exposed to developments that have become the source of the biggest destruction of confidence in Dubai’s history. To make matters more interesting the ports operator, DP World announced that it will be excluded from the debt standstill and restructuring of Dubai World and its subsidiaries. The company, the world’s fourth-largest ports operator, is 77 percent owned by Dubai World. DP World is considered the best asset within Dubai World. We think this move is clearly to differentiate the good assets of Dubai from the bad ones, and DP World is a good asset.

Credit default swaps across the region rose, including in Saudi Arabia, Qatar and Abu Dhabi which, unlike Dubai, hold rich hydrocarbon reserves. Dubai’s five-year CDS spreads are at three-month highs and there is further upside risk. Dubai, with sparse oil reserves, built its fortunes on real estate and financial services in recent years, borrowing heavily to finance mega projects including three man-made islands shaped as palm fronds.

Regional bond sales have been impacted as spreads have widened. Gulf Investment Bank which owned by the Saudi Arabian Monetary Agency (SAMA) and the Public Investment Fund of Saudi Arabia have decided to postpone the dollar bond sale. Other corporates in the region were also preparing to tap the international bond market. We think that there will be a temporary lull but renewed activity will begin in the first quarter of 2010 as risk is readjusted for the entire region.

Credit quality deterioration simply is not an issue in Saudi Arabia, Abu Dhabi and Qatar and we expect that in the short term, investors will calm down and begin to differentiate between “good” and “bad” bets in the Gulf region. The Dubai debt debacle comes shortly after Qatar, the world’s top exporter of liquefied natural gas, sold $7 billion in bonds this month, subscribed mainly by investors in the United States and the United Kingdom. Orders for the bond issue, described as the largest by an emerging-market government, topped $28 billion — underpinning the genuine faith many international investors have in the region.

We think that in the future, global investors will need to differentiate between those Gulf economies that are debt-burdened and those whose leverage levels are incredibly low by global standards. Saudi Arabia, the world’s biggest oil exporter, has among the lowest levels of public debt in the G20, with domestic debt levels at 13.4 percent of GDP last year, compared with 81 percent in India and 50 percent in the United States. It alsowww held enormous foreign assets of SR1.46 trillion at the end of October, most of which is invested in low-risk, liquid investments.

In view of these nuances, the region is often wrongly sold to the world as uniform when in fact the six states comprising the Gulf Cooperation Council (GCC) followed very different development models.

Even within the UAE, Dubai and capital Abu Dhabi — holder of the majority of the state’s crude oil reserves — had followed two extremely different development paths this decade. Dubai built its economy using high leverage, with revenue streams that were tenuous. Dubai’s volatile real estate and services sectors did well during the boom years but fell victim to the global financial crisis, which triggered a slump in asset values, especially real estate. It should not be ignored that Dubai was above all an interesting real estate play which benefited the early entrants which turned out to be bubble that burst. This approach differs heavily from Abu Dhabi, which was bringing in hundreds of billions of dollars in surpluses during this decade’s oil boom, but investing it in a more calculated, moderate pace that has mainly avoided the creation of asset bubbles. Despite the real estate development story in Abu Dhabi the authorities did not permit the development of a bubble. Dubai is now in a bind as its debt is more than nine time its 2008 revenues. That pattern is unsustainable.

Once the dust settles, we believe that there will be a flight to quality, with foreign funds favoring Saudi Arabia, Qatar and Abu Dhabi. Abu Dhabi is bound to suffer from the contagion from Dubai for the short term, but we expect the UAE capital will be in a position to overcome any risk profile pressure. Abu Dhabi controls 90 percent of the UAE’s oil reserves which are the fourth largest in the world. Despite the global financial crisis, the Abu Dhabi Investment Fund is one of the world’s largest sovereign wealth funds. Clearly, we think Abu Dhabi’s investment program and low key leadership offers reasonable reassurances about the country’s direction to avoid far fewer excesses.

The fate and handling of Dubai’s sovereign risk is impacting the way international markets perceive GCC sovereign risk. The Saad-Algosaibi debt default saga in Saudi Arabia, while shaking the credibility of regional borrowers, did not bring lending to Saudi entities in general to a halt. Rather, the situation forced creditors to reassess the risks involved with lending to different entities and categorize them accordingly. Corporates that are showing signs of transparency will begin to reap the benefits of finance from within the region and outside. However, state entities will continue to receive the bulk of trust from international lenders. In a similar way, Dubai’s debt problems will compel creditors to re-categorize sovereign risk. Dubai entities will have to work hard to convince to bring back confidence on the state-enterprise model of Dubai which was based on high leverage and constraint income.

If there is anything we have learned so far from the global financial crisis is that leverage and debt without a strong revenue base cannot sustain an economy. We find Saudi Arabia to be leading the pack in terms of sovereign strength despite the corporate saga that lingers. Moreover, Saudi Arabia and Abu Dhabi never witnessed the real estate excesses that have punished Dubai in the past year.

There was never a real estate bubble in Saudi Arabia and if anything the property market is severely undersupplied. The government has made sure to pay down government debt during the boom years and budgetary spending has been counter-cyclical — careful during periods of high oil prices and aggressive during cycles of depressed oil prices.

We view Qatar as being equally strong as a sovereign, with a solid revenue base to back up its expansion. The excesses witnessed in the property sector were far more contained and used far less leverage, with most, if not all was locally generated. Hence we see very little risk that Qatar can generate going forward.

After the dust settles: What’s next for Dubai

Dubai’s reputation has been impacted in a major way and it will be difficult for the emirate to recover from the negative backlash in the medium to long term. The lack of transparency surrounding how the emirate plans to pay back debts reaching maturity has compounded investors’ perception of risk. Until the Dubai World announcement, investors had expected Abu Dhabi would provide Dubai with adequate funds to pay back its creditors. Just an hour before the debt restructuring news, Dubai announced it had sold $5 billion in bonds to two banks in Abu Dhabi in which the government holds substantial stakes. But the government quickly clarified these funds had nothing to do with the Dubai World debt restructuring.

Earlier this year, the UAE central bank, based in the UAE capital, subscribed for $10 billion in Dubai sovereign bonds, a portion of which went toward enabling state-linked developers pay outstanding dues to contractors. That move eased investor worries about a potential default by Dubai, but also raised questions about what Abu Dhabi would demand in return. The two emirates, although being part of the same federation, are run by separate ruling families.

The entire debt repayment scenario has now been thrown into question. The Nakheel bond is, after all, the most high-profile of Dubai’s debts and was regarded by many as a litmus test for how effectively Dubai — and Abu Dhabi — would treat maturing debts. Markets, puzzled about why the $5 billion raised by Dubai this week was not going to Nakheel bond creditors, will be watching for news on how the debt restructuring develops and what conditions Abu Dhabi could set for providing funds to pay outstanding loans.

Dubai ruler Sheikh Mohammed bin Rashid Al-Maktoum, also prime minister of the UAE, removed this month key executives who helped shape modern Dubai, including replacing the governor of the Dubai International Financial Centre, Omar bin Sulaiman, and removing the chairmen of Emaar Properties, Dubai World and Dubai Holding from the board of the Investment Corporate of Dubai, a body charged with managing the emirate’s wealth. At the newly reshuffled board of ICD, two of the ruler’s sons were brought in as directors. The change of guard will have to be tested and the results and management style would be watched closely by the international investor community. Moreover, the larger question of succession would be kept at the back of the international investors’ minds.

There has been little public announcement about the conditions attached to Abu Dhabi aid to Dubai and what level of autonomy the emirate would have to forego in exchange for the financial bailout. We believe that in the end, Abu Dhabi will be willing and able to provide adequate funds to enable Dubai to meet its debt obligations. We are not of the view that Abu Dhabi wants to have a “sick cousin” that would jeopardize the well-being of the Federation. Abu Dhabi wants to see Dubai’s economy return to a healthier state as many Abu-Dhabi based businessmen have invested in the property sector and the economy of Dubai at large. Abu Dhabi will have three avenues to pursue: Pay, buy and bail out. This funding, however, will come at a cost not measured in money. Politics in this region is more powerful that simple monetary transactions. But in the end, Dubai will not be able to cover its debts on its own and the de-leveraging process could last not a few months but a few years.

Bailing out Dubai could be good for the Federation but nothing is for free. Will Abu Dhabi ask for additional control over Dubai, will this make Dubai less autonomous? As there is no free lunch and all services have to be paid back the price that Dubai might have to pay back to Abu Dhabi is some of its autonomy. Dubai would have to yield to the conditions of its rich neighbor in order to save face among global creditors. It is very difficult for Dubai not to prevent Abu Dhabi from gaining additional influence, both at the level of the federation as well as bilaterally. And the Dubai leadership’s language has changed and become more supportive of the federation. The most vivid of all was the comments of Dubai’s ruler who said in earlier in November that people who speculated about relations between Dubai and Abu Dhabi should “shut up,” at an investors’ conference in Dubai. The ruling lines of both emirates are “the same family, not only that but the same tribe, the Bani Yas tribe,” he said. They “ruled many many tribes in the Arabian Peninsula for hundreds and hundreds of years.”

It is important to note that it was only in 1996 that Dubai integrated its armed forces into the UAE’s military command. The sense of Dubai’s autonomy was also evidenced after the UAE’s establishment in 1971 where there were border check points, for many years, between Abu Dhabi and Dubai even if both were part of the federation.

Dubai’s economy, meanwhile, is poised to face another backlash from the debt troubles, which are likely to shake investor confidence in its real estate sector once again and send prices that have already halved in the last year down further. Although Dubai’s property developers, controlled by the state, are trying to control real estate prices by holding back the release of additional apartment units onto the market it could be that prices could very well depreciate further. The emirate could also be forced to introduce further delays to infrastructure projects currently in the pipeline.

We think that Abu Dhabi plays a key role in supporting debt-ridden Dubai. Dubai’s leveraged property play has come to abrupt and crashing end. Going forward Dubai needs to show resolve but also willingness to admit to greater transparency. Dubai also needed to better time the announcement of its the debt restructuring. Dubai is in dire straits and Abu Dhabi will come to the rescue but like all rescues it would have a price. As for the international investor base, it should become apparent to them that Dubai is not core of the GCC and there is far greater depth to the region than remains untapped.

(John Sfakianakis is chief economist at Banque Saudi Fransi — Credit Agricole Group)

Dubai World's never ending story

It is interesting indeed to live in Dubai nowadays. When I came over in 2000, Dubai was still in the early days to be the world class city before tumultuous crisis reveals more about Dubai and its massive debts.

In 2002, I was part of a conglomerate which is later known as Dubai World until last October. I was there when things were fast and furious as well as there during everything seemed standstill.

I still have faith in Dubai for some personal reasons. The recent news on debt deferment is shocking for those who are used to Dubai's glitters and frantic development during last few years. Lot of rumors and stories, lot more to come and bear with them!

You can believe the rumors and stories....and you can see the opportunities beyond the news.

The facts behind the Dubai World story

  • Last Updated: November 27. 2009 11:22PM UAE / November 27. 2009 7:22PM GMT

The Government of Dubai took the global financial markets by surprise on Wednesday by saying it would ask all creditors of Dubai World and Nakheel to “standstill” and extend their loan agreements by six months.

The Government, acting through the Dubai Financial Support Fund, has appointed Aidan Birkett, a veteran of Deloitte, as the chief restructuring officer of the company. The news was unexpected because Dubai World said on October 15 that it had completed a restructuring that would eliminate 12,000 jobs and save $800 million over three years, and because members of the Government had previously said the emirate would meet its obligations.

An Islamic bond, known as sukuk, with a face value of $3.52 billion (Dhbn12.92) is coming due on December 14, but it is only the beginning. Dubai World is obliged to repay a total of $9bn of debt over the next four months.

Below we try to answer questions about the drama, which has rattled global markets.


What is Dubai World?

Dubai World is a large Government-owned conglomerate with interests in everything from ports to property and diamonds. Dubai World has $59bn worth of debt and obligations, according to financial statements. Its most well-known companies are DP World, one of the largest owners of ports in the world, and Nakheel, a property developer that created The Palm islands, The World and The Waterfront.


How much does Dubai World owe?

Dubai World has $8.75bn in direct debt. When this is added to the loans and debts of its subsidiaries, it owes $24.27bn, according to estimates by Deutsche Bank. But when all its unpaid invoices and other non-debt obligations such as land grants are included, the group has roughly $60bn in total consolidated liabilities, according to the company in August.

Why does Dubai World have problems repaying its debt?

Dubai World has run short of cash because of the fall in property prices, losses on investments and a drying-up of credit markets. Its ports operation, DP World, is still profitable and is exempt from the restructuring.

Where does the Dubai Government stand?

In a statement on Friday it pointed to the “need to take decisive action to address its particular debt burden”. Analysts expect Dubai World to probably sell some assets and reduce costs in line with its forecasts for future revenues. The Dubai Financial Support Fund (DFSF) administers funds from its $20b bond programme. The Government has said the funds will be allocated to “Dubai’s strategic revenue-generating projects”. The fund is expected to use stringent conditions designed to ensure that it can repay the money it has borrowed, plus the 4 per cent interest due annually.

What will creditors do?

The most immediate question for creditors is what Dubai World will do about Nakheel’s $3.52bn Islamic bond that comes due on December 14. The DFSF and Dubai World have not elaborated on plans for the sukuk. Nakheel may be able to persuade bondholders to change the terms of the bond by the end of next month, avoiding a technical breach of its payment obligations, its prospectus says. Otherwise, Nakheel will have a two-week window after December 14 to make a payment before bondholders would be entitled to begin legal proceedings to recover their funds. In the case of nonpayment after December 28, the transaction administrator, Deutsche Bank in London, would be obliged to notify bondholders.

Deutsche Bank would then call a meeting for certificate holders to vote on how to handle the situation, the prospectus says. To meet a quorum, there would need to be enough certificate holders to represent more than half of the aggregate amount of the bond. A 75 per cent vote would be needed to pass an extraordinary resolution to either begin enforcement proceedings against Nakheel and Dubai World, or restructure the bond.

There are few precedents for non-payment of sukuks and it could be very complex and time-consuming. For each impending debt repayment, the restructuring team would have to negotiate and persuade lenders to agree to new terms, and the company also has a number of contractors and suppliers who are waiting to be paid.

Are there historical precedents?

There are no exact matches in history to give an indication of how things will go. Dubai World is a government-related enterprise owned by the Emirate of Dubai, but with some of the attributes of a normal commercial company, like a stockmarket listing (DP World) and a credit rating (Jafza). So it is hard to compare with previous cases of financial hardship. Two analogies have been used in recent days: Argentina went through a sovereign default in 2001 when currency instability led to a run on the banks, ending only when the peso was allowed to float on global markets. The effects were severe, but the Argentinian economy eventually recovered.

Eurotunnel, the Anglo-French infrastructure project, also went through a series of financial convulsions in the late 1990s and early 2000s, mainly due to excessive borrowings to build the Channel Tunnel. The crisis passed when creditors sought and were granted equity control of Eurotunnel. Another possible precedent is General Motors of America, which went into bankruptcy protection during the credit crisis, took large amounts of government aid, and eventually emerged smaller but financially viable.

business@thenational.ae

To raise a child can cost 1 Million

In material world, it is a high risk investment to raise a child in this century. Being parents in the modern world can cost a lot more than the previous generations and certain elements of uncertainties can have some affects on the 'investment'.

Basically on equal term, the costs of raising children are the same for all of us. Children have needs and while we might think of the obvious ones, we need to factor in absolutely everything a child will require until it's independent.

A research breaks down costs into ten groups, whereby the Housing and childcare are the two most expensive, then food. Living in the UAE, the education is another expensive expenditure.

The ten groups include:

  • housing
  • childcare
  • food
  • energy
  • clothing and footwear
  • household goods and services (including education)
  • leisure
  • personal care
  • transport
  • health
I have three good boys, millions or not to raise them, at the end of the day, they are part of responsibilities and amanah (trust) from Allah. Been telling them, they can be Canadians, British, Americans, Australians, New Zealanders or Malaysians, as long as they are good Muslims first, I do not mind.

Below article is based on a research in Australia, it is good to know the cost of raising kids in Malaysia.

It costs a million to raise a child

Generation Z doesn't leave home at 18, but stay with the parents until mid-20s

  • Reuters

  • Image Credit: Supplied

Sydney: Think your children are costing you a lot? You're right, with an Australian study finding that the average child now costs A$1 million (Dh3.33 million) to raise, taking into account toys, holidays and other activities.

A study on Generation Z and the cost of parenting by social analyst Mark McCrindle found a government estimate that it cost $384,543 to raise a child to 18 was way off as this did not include private education, holidays or "non-essential" items.

It also assumed that children would leave home at 18 but this was no longer the case with Generation Z, those born after 1995, as the costs of accommodation and bills were a deterrent to moving out.

"In today's Australian families the majority of young people stay in the parental home and rely on their parents for some of their expenses until their mid-20s. Therefore the cost per household to raise children to age 24 is $834,000," McCrindle from McCrindle Research said in his report.

He said then you had to add the "non-essential" yet "usual" child rearing expenses such as toys, holidays and travel, dining and entertainment, private tutoring and education, sport and activities, furniture and household equipment dedicated to the children's use.

This boosted costs by another $3,000 per child per year.

The A$1 million pricetag was broken down into food costing $206,000, housing and utilities $165,000, recreation and entertainment $157,000, health and other services $153,000, clothing and equipment $129,000, transport $123,000, and education and child care $95,000.

Dubai Debt Shocker

Confidence about the world economy was hit hard by the news that Dubai World, a government investment company with around $60 billion worth of debt, has asked creditors if it can postpone forthcoming payments until May. Investors are wondering whether the current uncertainty surrounding the emirate has brought the eight-month equities bull run to an end.

Analysts said more clarity about the long-term impact of Dubai's troubles would likely emerge next week, when Wall Street is back to normal trading hours following the Thanksgiving Day holiday. U.S. markets are only open for half the day Friday.

"It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested but for the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course," said Jane Foley, research director at Forex.com.

Investors were also keeping a close eye on associated developments in the currency markets after the dollar slid to a new 14-year low of 84.81 yen.



Dubai debt: news latest

BANK SHARES: European and Asian markets plunged on concern about potential exposure to debt problems in Dubai. (Getty Images)

Dubai will remain an attractive regional business hub, despite the government having to asked for a standstill agreement regarding the debts of its flagship companies Dubai World and Nakheel, a senior figure has said in a statement.

The government's intervention in the debt restructuring at Dubai World, was aimed to ensure the holding company’s "long term commercial success", said Sheikh Ahmed Bin Saeed Al Maktoum, chairman of Dubai Government's Supreme Fiscal Committee in comments published by news agency WAM.

“We want to ensure resources are deployed in the full knowledge that they are used to enhance the businesses of the Dubai World Group, build on the restructuring that has already been taking place and ensure long term commercial success," said Sheikh Ahmed, who is also chairman of Dubai Civil Aviation Corporation, chairman and chief executive of Emirates Airline and Group.