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Monday, November 30, 2009

Dubai govt won't guarantee Dubai World's debts

Investors face huge losses as Dubai abandons debt company

The Government of Dubai said today that it will not stand behind its wholly-owned subsidiary Dubai World, prompting fears that the company’s creditors could lose billions of dollars.

Today's comment, from Abdulrahman al-Saleh, the director general of Dubai’s Department of Finance, effectively confirms that country does not have enough money to repay Dubai World’s $60 billion of liabilities. Deloitte, the accountancy firm, has been called in to restructure the giant business.

Last week, the state-owned conglomerate sought a six-month standstill on repaying its debts.

Dubai World's borrowings include a $3.5 billion Islamic bond that was due to be repaid by Nakheel, the property developer behind the Palm Jumeriah islands, in two weeks.

Many creditors had assumed that the structure of Islamic bonds implied there was state backing for this type of financing and Dubai’s failure to support the Nakheel debt could have damaging implications for the wider Islamic market.

UK banks are among 70 institutions to have loaned Dubai World money in recent years as the company grew rapidly and bought foreign assets such as the Turnberry golf course in Scotland and P&O ports. Dubai's Department of Finance said creditors will be affected in “the short term” by the Dubai World's restructuring.

Royal Bank of Scotland (RBS) has arranged $2.3 billion of loans for Dubai World since 2007, although it is not known how much the bank could lose if the company defaults.

The Financial Services Authority, the City watchdog, is understood to be discussing possible exposure to Dubai World losses with the UK banks.

There had been hopes the Dubai government would issue a statement on Dubai World earlier this morning.

Markets across Europe and Asia had rallied this morning after this weekend’s intervention by the Central Bank of the United Arab Emirates, which will provide an emergency liquidity facility for local lenders.

Abu Dhabi, Dubai's rich sister nation, also said it would provide support on a “case-by-case” basis.

However, hours of silence from the Dubai government knocked investors' confidence and the FTSE fell 47.72 points to 5,198.96 in early afternoon trading.

There are also fears that US shares could plunge for a second day.

US shares tumbled more than 154 points on Friday, but the number of shares changing hands was relatively small since many investors were away following Thanksgiving on Thursday.

It is thought that today’s trading in America would give a more realistic reaction to Dubai’s financial woes as people return to work.

Dubai’s main stock exchange slid more than 7 per cent and Abu Dhabi markets fell more than 8 per cent. Today is the first time UAE investors have had the chance to react to last week’s announcement following the four-day religious holiday for Eid al-Adha.

It has also emerged today that Nakheel has requested that all three of its sukuks (Islamic bonds) traded on the Dubai stock exchange be suspended. This includes the $4 billion sukuk due to mature on December 14, which triggered the current crisis.

The group’s statement said the three sukuks would remain suspended “until it is in a position to fully inform the market”.

Jebel Ali Free Zone, a division of Dubai World, made an interest coupon payment on its 7.5 billion Dirham (£1.24 billion) sukuk, which matures in 2012. The payment, believed to be around 130 million Dirhams, was confirmed by banking sources in Dubai.

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