My latest story is in Institutional Investor magazine, on Dubai reckoning with its debt hangover, three years after it announced it would not be able to pay its debts. Here is an excerpt to the story. The full link is available here for a limited time.
June 2012 • Angela Shah
IN EARLY APRIL, DUBAI’S MUNICIPAL GOVERNMENT reported that the number of abandoned cars — the symbol par excellence of the once-high-flying emirate’s economic bust — rose by 10 percent in the first three months of this year from the same period a year earlier. But rather than seeing that indicator as a sign that the economy was taking a turn for the worse, leaders attributed the pickup to simple efficiency: The authorities now have three tow trucks to bring in vehicles, compared with just one last year.
The car repo business, with numbers that can be good or bad, depending on how you look at them, is a good metaphor for Dubai’s economic and financial condition. The emirate, which splashed on the global scene a decade ago with a flashy, money-is-no-object development philosophy, only to be brought down by the near-default of some of its flagship companies three years ago, has been quietly getting a handle on its debt problems. Since late 2009, Dubai and its government-related entities have restructured more than $20 billion of bank debt, nearly two thirds of the total, by arm-twisting creditors with a decree that resembles a Western-style bankruptcy restructuring. The emirate’s economy is also on the mend, with moderate growth buoyed by a rebound in tourism and trade.
Dubai may have bounced off the bottom, but it still has a long way to go to resolve its debt problems and return its economy to robust health. Government-related entities such as Dubai World, the conglomerate that set off the crisis in late 2009 by declaring a debt standstill, have rescheduled a large portion of their obligations, but they remain saddled with a massive burden. In its latest report on the United Arab Emirates, issued last month, the International Monetary Fund estimated that the overall debt of Dubai’s GREs — including bank debt, bonds and sukuk (Islamic bonds) — stands at $84.3 billion, or 60.4 percent of GDP. That debt mountain has declined by about $5 billion over the past two years, but the GREs still need to roll over an estimated $14 billion of debt this year.
Fully 10.6 percent of the loans held by Dubai banks are nonperforming, the IMF says, and that ratio could jump by another 5 percentage points this year if the authorities manage to reschedule the debt of other government-related entities. Although the real estate market shows signs of stabilizing, property prices have fallen by about 60 percent since 2008, and vacancy rates range from 20 percent for retail property to 30 percent for office buildings. Dubai is slowly healing, but there is no quick remedy for its troubles.
“The only way for Dubai to fix its problems is to grow the economy and generate income, and trade its way out,” says Neil Cuthbert, a senior partner at the Dubai office of law firm SNR Denton. “Over time it will happen. The interesting question is, how long will the banks be happy to carry on pushing out maturities?”
So far, the banks have had little choice but to do so, and the authorities have taken full advantage of that fact. Exotix, a London-based investment bank specializing in frontier markets, has dubbed the authorities’ strategy “the four B’s” — “bail out bondholders, burn the banks” — and that formula has been remarkably successful, says Ahmad Alanani, the firm’s Dubai-based director of fixed-income sales. “Aside from the speed at which they’ve managed to restructure, what surprised me the most were the terms that they’re getting away with,” he says. “They have pushed the banks to the limits, both local and international.”
In April, for example, Dubai International Capital, a private equity firm owned by the emirate’s ruler, Sheikh Mohammed bin-Rashid al-Maktoum, persuaded its lenders — including HSBC Holdings, Lloyds Banking Group and Royal Bank of Scotland Group — to stretch out the maturity of $2.15 billion in loans by five years at an interest rate of just 2 percent. The banks also agreed to extend the maturity of an additional $350 million in loans by three years.
Dubai Group, the sheikh’s main financial services holding company, is currently holding talks with lenders in a bid to restructure as much as $10 billion in bank debt. Exotix estimates that Dubai so far has completed six bank debt restructurings, covering $21.9 billion of the GREs’ total bank debt of $34 billion. That is much more than Alanani thought would be possible not long ago. “I was definitely bearish in 2010,” he says. “The restructuring is going so much better than what I was expecting.”
What explains the success? Bankers say Dubai has aggressively pursued its debt restructuring strategy from a position of surprising strength. International banks want to preserve their existing commercial ties in the emirate and to continue to do business there, a fact that the emirate is not shy in pointing out during negotiations.