The Government of Dubai may have to convert its US$1 billion (Dh3.67bn) loan to Dubai International Financial Centre (DIFC) Investments into shares, the US investment bank JPMorgan says. DIFC Investments, which owns the infrastructure and property of the DIFC, has more than $3bn in liabilities. It is in the process of putting together a restructuring and disposals plan to reduce this debt.
JPMorgan said the debt-for-equity swap - which would see the Government writing off its debts in exchange for shares in DIFC Investments - would be necessary "for the company to achieve a sustainable capital structure". The Government would also have to inject between $300 million and $600m of new capital into DIFC Investments, it said. A similar process of equitisation and capital injection was among the core proposals in the restructuring of Dubai World, which most creditors have welcomed.
In a research note, the US bank said DIFC Investments would be able to raise about $900m from the sale of non-core assets, including its entire investment portfolio apart from property, and its holding in Borse Dubai, the emirate's stock market operator. DIFC Investments declined to comment on JPMorgan's equitisation suggestion or any other parts of the research note, but in a statement to The National it gave further details on its disposal plan. "DIFCI will continue to manage its strategic investments while enhancing and optimising the value of its portfolio companies," it said.
"DIFCI may divest certain parts of its investment portfolio to create robust liquidity streams across the business, while maintaining a very strong focus on augmenting returns from its core business lines as well as creating operational efficiency. Any asset divestment would be evaluated on opportunity and other factors that would determine the profit [or] loss on exit." DIFC Investments's statement raised questions over the future of its holding in Dubai Aerospace Enterprise (DAE), the emirate's high technology investment unit. A source familiar with the situation said the DAE stake was a "strategic" but not a "core" asset.
JPMorgan gave the DIFC's 23.3 per cent holding in DAE a "zero valuation" in its report. Other assets that could be for sale include the SmartStream financial IT group, as well as shares in the stock market operator Euronext, and holdings in the Egyptian arm of Etisalat and the UAE private equity group Abraaj Capital. The JPMorgan report upgrades its rating of DIFC Investments's $1.2bn sukuk due in 2012 to "neutral" from "underweight" because of improved asset coverage for the Islamic bond.
It said Dubai was "expected to sustain its position as the regional financial centre", despite DIFC Investments's "financial challenges." "Service sector customers are Dubai's lifeblood, and therefore there is a relationship of dependence on Dubai's part on such clients, reducing the risk of unpredictable changes in laws and regulations that is not unusual across the GCC," said the report. "We believe that this is the single most important reason why international institutions will continue to be comfortable with the idea of basing their regional offices in Dubai. Also important is Dubai's status as the most liberal and foreigner-friendly venue in the region.
"So far as DIFC is concerned, the financial free zone has developed a critical mass of tenants on the back of its first-mover advantage, grade-A infrastructure and status as an offshore, self-governing entity with its own laws and court. "Even as the global slowdown has taken a toll on DIFC, in our view DIFC will continue to be the favoured regional financial centre for existing and new tenants."
@Email:fkane@thenational.ae
