The US$10 billion (Dh36.73bn) in financial assistance to Dubai announced last month by Abu Dhabi includes $5bn committed in November by two Abu Dhabi-controlled banks, Dubai said yesterday. Dubai announced in mid-December that Abu Dhabi would lend it $10bn to help prevent cash-strapped companies controlled by the Dubai Government, notably Dubai World, stay afloat after the financial crisis impacted their ability to keep up with debts accumulated during the property boom.
Until now, it had been unclear as to whether the $10bn, which Abu Dhabi will use to buy Dubai bonds, represented an entirely new commitment or whether it included $5bn in bond purchases announced on November 25 by two banks controlled by Abu Dhabi - Al Hilal Bank and the National Bank of Abu Dhabi (NBAD). They have already disbursed as much as $1bn of those funds. New questions were raised about the funds when, only hours after the deal's announcement, Dubai World announced that it would ask creditors for a standstill arrangement on its debt payments.
Analysts and bankers consulting with the governments of Abu Dhabi and Dubai, speaking on the condition of anonymity, said that as part of its $10bn investment in Dubai bonds, Abu Dhabi plans to assume the remainder of the banks' $5bn purchase commitment. A spokesperson for the Dubai Government confirmed yesterday that the latest financial package included the $5bn, but declined to comment on how Abu Dhabi planned to channel the funds. Neither Abu Dhabi's Department of Finance nor Al Hilal Bank could be reached for comment.
Amelia Soares, the head of investor relations and corporate affairs at NBAD, said she was unaware of any changes and that the bank's contract to purchase Dubai's bonds remained in effect. The new details about Abu Dhabi's financing arrangements with Dubai lend sharper focus to the evolving effort by the two emirates to manage and eventually reduce the estimated $62bn owed by the companies that Dubai controls.
Analysts said the new details did not signify a reduced commitment from Abu Dhabi, but rather that there may be more funds available if Dubai needs more as its debt workout progresses. "It's not the overall number investors are looking at," said Ali Khan, the managing director at Arqaam Capital. "The liquidity is certainly not an issue, and if and as when it's needed they do have an ability to drawn down on it."
But it does lift a burden from NBAD and Al Hilal. Analysts said the banks were already well capitalised and that the Abu Dhabi Government was prepared to deposit whatever cash was necessary to ensure that they had enough cash to buy Dubai's bonds. But after Dubai World's restructuring announcement on November 25, prices for Dubai bonds plummeted and have remained well below previous levels, raising the prospect that the banks would have to buy Dubai's bonds at a premium to their perceived value on the market.
Some analysts had begun estimating the size of aid extended to Dubai at $25bn. That number now appears to be closer to $21bn, of which only $15bn has yet been given over to the Dubai Financial Support Fund, the agency created last July to manage the funds and oversee their use and repayment by recipient companies. In the end, however, Dubai appears to have drawn down even less than the $1bn made immediately available to it in November, analysts said.
Deposits at financial institutions in Dubai indicate that it may have sold NBAD and Al Hilal between $600 million and $700m worth of bonds, they added. "Money from Abu Dhabi to Dubai has to go into banks at some point," said John Tofarides, a banking analyst at Moody's Investors Service, the ratings agency. Dubai first began receiving financial assistance in February, when it sold $10bn in five-year bonds to the Central Bank, paying 4 per cent interest annually. At the time, Dubai said the $10bn was the first half of a $20bn bond programme.
Many analysts assumed that the Central Bank would purchase the second $10bn late last year, but questions began to emerge over whether doing so might consume too much of the Central Bank's reserves. With global financial markets rallying on low US dollar interest rates and investors snapping up debt from emerging-market borrowers, Dubai ventured back into the international bond market in October, announcing a $6.5bn bond programme.
But its initial foray, which raised $1.93bn selling Islamic bonds, came amid a brief retreat by markets and ended up with Dubai having to offer investors annual interest of roughly 6.5 per cent. On November 25, NBAD and Al Hilal announced their intention to purchase $5bn in Dubai bonds, which bankers said bore terms identical to the bonds sold to the Central Bank in February. Later that day, however, Dubai issued its surprise announcement about Dubai World, indicating it would seek a restructuring of $26bn of debt, including a $3.52bn bond that was maturing on December 14.
Prices for Dubai bonds dropped as major ratings agencies cut ratings on Dubai corporate issuers after downgrading their assumptions on the likelihood of government support. One ratings agency, Moody's, went even further, putting Abu Dhabi Government-owned companies on review for a potential downgrade, arguing that if Dubai and Abu Dhabi had declined to step in to guarantee Dubai World's debts, they might do the same if the other companies ever ran into financial difficulty.
On December 14, Dubai announced that Abu Dhabi would lend it $10bn, including $4.01bn needed to pay off Nakheel's bonds. That amount was paid directly, bankers said, by Abu Dhabi's Department of Finance. The remaining $5.9bn, it said, would be used to help Dubai World make interest payments and provide it with working capital. That includes the roughly $1bn already lent by NBAD and Al Hilal, leaving $4.9bn for Dubai to tap.
Some analysts believed that Abu Dhabi would route its funds through local banks, including the $4bn still available under NBAD and Al Hilal's November 25 contract. In return for buying Dubai's bonds, the banks would receive an equivalent amount from the Government in the form of deposits. But analysts and bankers say Abu Dhabi is instead planning to buy the bonds directly through the Department of Finance, relieving NBAD and Al Hilal of their commitments.