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Dubai Stands Behind Investments, Sees No Refinancing Risk

Dubai, the Persian Gulf emirate that teetered on the brink of default in 2009, vowed to stand behind its “strategic investments” including those facing debt refinancing such as DIFC Investments LLC.

The government doesn’t anticipate that DIFC Investments, a unit of the emirate’s tax-free business financial center, or Jebel Ali Free Zone FZE, another business park, will have trouble refinancing bonds due next year, said Mohammed Al Shaibani, director general of Dubai ruler’s court.

“We’ll back up any strategic investment we have,” he said in an interview in Washington yesterday. “As Dubai, I have interest to back up the government entities and the government-related enterprises -- anything that’s sizable with a major benefit to the economy.”

The explicit government support may encourage investors to buy Dubai debt when concerns about a global economic slowdown subside, said John Bates, the head of fixed income at London-based Silk Invest Ltd. Islamic bonds of Jebel Ali and DIFC Investments fell this week as investors shunned riskier assets.

Jebel Ali must repay 7.5 billion dirhams ($2 billion) when its Shariah-compliant debt matures in November 2012, while DIFC Investments has a $1.25 billion sukuk due in June 2012. The price on Jebel’s Islamic bonds slipped to 90.33 today from 92.31 on Sept. 16, while DIFC declined to 90.25 from 92.06, according to data compiled by Bloomberg.

Roiling Markets

Dubai roiled financial markets in 2009 when Dubai World, one of its three main state-controlled holding companies, tried to stop repayments on about $25 billion of debt, before reaching a restructuring agreement with creditors in March.

“We take moderate confidence in the vows of support by the Dubai government but it’s early days given global risk sentiment,” Bates said by e-mail today. “I can see the market rebounding fast when the time is right, as there is a lot of cash out there which will be ready to seek value.”

The difference between the average yields on Islamic bonds from the six-member Gulf Cooperation Council and the London interbank offered rate widened 14 basis points this week to 299 basis points as of Sept. 22, the most since April, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index.

Dubai borrowed at least $129 billion to turn itself into a tourism, trade and financial services hub, according to Credit Suisse Group AG. Policymakers are keen not to repeat past mistakes, said Al Shaibani, who is also chief executive officer of the Investment Corp. of Dubai, one of the main state-owned holding companies.

Lessons Learned

“We learned quite a bit in the process how to conduct our business,” he said. “We took things for granted in the beginning. When everything is booming you kind of overlook certain things.”

With about 7 percent of the world’s proven oil reserves, the United Arab Emirates, of which Dubai is the second-largest member, has been spared the unrest that shook countries such as Egypt, Tunisia, Libya, Syria and Bahrain.

Agreements with creditors have also helped give the emirate and its companies “breathing space” and ruled out any “fire-sale” of its assets, Al Shaibani said.

“We planned the process of restructuring to be between five to eight years,” he said. “Why would I sell anything today? If we do sell something, most likely we would be selling it closer to the five years and eight years.”

LSE, Nasdaq

Dubai, through its companies, holds stakes in entities such as the London Stock Exchange and Nasdaq OMX Group Inc, owner of the second-largest U.S. equity exchange. The timing isn’t right to sell those interests, Al Shaibani said.

“Most of these companies were a private equity exercise,” he said. “They were bought to be sold later at a certain value. We haven’t realized the value yet. We are not obliged to sell them.”

Dubai has $31.2 billion of debt coming due this year and in 2012, according to an International Monetary Fund report published on June 16.

The cost to insure Dubai’s debt from default climbed this week to the highest level since December. Five-year credit-default swaps rose 16 basis points, or 0.16 percentage point to 481 today, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Dubai’s debt may continue to be hampered by concerns about the global economy, said Sergey Dergachev, who helps manage $8.5 billion of emerging-market bonds at Union Investment Privatfonds in Frankfurt.

Global Environment

“Market timing now is very unfortunate since emerging-market debt is burning down in the last two days and the Middle East and North Africa is no exception,” he said by e-mail today. The “global environment is in a risk-off mood at the moment.”

Only “some smaller companies” may need to restructure their debt, Al Shaibani said. “There are some companies that had a little bit of exposure to the property sector and they need to clear up some issues and focus on growth again.”

The government may not extend the same helping hand to all companies. For Drydocks World LLC, a company restructuring $2.2 billion of debt, the responsibility falls more on its parent, Dubai World, Al Shaibani said.

“Personally, I think Dubai World should really play a major part in supporting Drydocks not so much the government,” he said.

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