Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month.
Dubai World will use the money to cover debt of real-estate unit Nakheel PJSC that comes due today. The rest of the money will cover Dubai World's interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai's government said in an e-mailed statement.
After the emirate and its state-controlled companies borrowed $80 billion to diversify away from dwindling oil supplies, Dubai's ruler, Sheikh Mohammed Bin Rashid Al Maktoum, has been forced to seek Abu Dhabi's help three times this year as the global financial crisis dried up credit and triggered a property crash in the city state.
"It comes as a relief for the market, underpinning hopes that the implicit government support for Dubai corporate issuance is intact," said Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. "Whilst we are not out of the woods yet, it is definitely a step in the right direction."
The Dubai Financial Market General Index climbed 10 percent, the most in 14 months, leading a worldwide rally in equities that drove the MSCI World Index up 0.4 percent. Dubai's Nov. 25 announcement that state-owned Dubai World would seek to delay debt repayments spurred the emirate's steepest stock-market selloff in 13 months and Europe's worst rout since April. Nakheel's $3.52 billion sukuk tumbled as much as 62 percent in three days, according to Citigroup Inc. (C).
Leeway to Dubai World
"The fund injection gives some leeway to Dubai World to put together an orderly debt restructuring plan as it tries to alter its debt profile," said Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd.
Nakheel's Islamic bonds due 2011 surged to 67.5 cents on the dollar after halving in value to as low as 37.5 cents, according to Citigroup prices. Dubai's benchmark share index jumped to 1,871.2. The measure had lost 19 percent since Dubai World on Nov. 25 sought a "standstill" agreement on its debt.
The cost of protecting investors against Dubai defaulting on its debt tumbled the most since February. Five-year credit-default swaps on Dubai's debt fell 135.5 basis points to 405, according to CMA DataVision prices.
Abu Dhabi's support "provides funding and a stable basis for the restructuring process, which continues," Dubai World said in a separate e-mailed statement. The terms of today's transaction won't be disclosed because it was an internal transfer between the two governments, a source close to the Dubai government told reporters in a conference call today.
Abu Dhabi is the largest of the seven emirates that formed the United Arab Emirates in 1971 and owns more than 90 percent of its oil reserves, the world's sixth largest. Dubai, the second-largest emirate, has traditionally guarded its autonomy, maintaining a separate army until 1996 and keeping full control of economic affairs.
The latest $10 billion bailout followed the sale of $10 billion in Dubai bonds to the national central bank based in Abu Dhabi in February and a $5 billion loan by two Abu Dhabi-owned commercial banks on Nov. 25.
Dubai's bailout announcement sent European banking stocks higher, led by Standard Chartered Plc and HSBC Holdings Plc (HBC). Royal Bank of Scotland Group Plc (RBS) was the biggest underwriter of loans to Dubai World, while HSBC has the most at risk in the U.A.E., according to JPMorgan Chase & Co. RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in a report on Nov. 27, citing Dealogic data.
HSBC on Nov. 27 said it had $15.9 billion in loans to customers in the U.A.E. at the end of June. Standard Chartered has $18 billion of loans to the Middle East and South Asia, of which two thirds relates to the U.A.E., the bank said last week.
Nakheel, which is building palm tree-shaped islands off the emirate's coast, posted a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property. The firm's repayment of the $3.52 billion bond was the biggest debt obligation for a Dubai entity since global credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc.
"The vast majority of investors have lost money here," said Luis Costa, an emerging markets debt strategist at Commerzbank AG in London. "Imagine the number of investors who actually had to get rid of this paper under the default pressure. This outcome will raise red flags on Dubai's ability to make independent decisions."
Rating firms have downgraded some of Dubai-owned firms to junk levels since Dubai World entered into negotiations with lenders to renegotiate debt terms.
"We don't anticipate any knock-on effects on the other government related entities' ratings" from Dubai's announcement that it received cash from Abu Dhabi, Standard & Poor's credit analyst Farouk Soussa said in an interview.
While Dubai's government owns 100 percent of Dubai World, it hasn't guaranteed the company's debt and creditors must help it restructure, Abdulrahman Al Saleh, director general of Dubai's Department of Finance, said Nov. 30.
Dubai also said today it will announce a new bankruptcy law based on international standards that state-owned Dubai World may use to restructure debt. The new law will be available "should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations," the government of Dubai said.
Dubai's government issued a decree setting up a special tribunal to complete Dubai World's restructuring and to settle disputes between the company and its creditors. The court will be headed by Anthony Evans and will use insolvency laws of the Dubai International Financial Centre, a business park for financial services companies. Evans is chief justice of DIFC Courts.