The 2010 restructuring of Dubai World went a long way towards solving the emirate's deficit problems, but perhaps not far enough. There is still much work to be done, Frank Kane writes
A fundamental question is being increasingly posed in the convoluted saga of Dubai's attempts to manage its debt problems:
Just how good was the 2010 restructuring deal that "fixed" some US$25 billion (Dh91.82bn) of liabilities owed by Dubai World, the emirate's most indebted government-related enterprise.
On one hand, a banker who was involved in the 2010 talks says: "The most urgent problem facing Dubai was solved back then, and none of the current debts has the same potential to destabilise Dubai's economy. They have to be dealt with, of course, but that can be done on a case-by-case basis. It's just a tedious process that will have to be gone through."
Other experts are less sanguine about the Dubai debt issue and point to a flaw in the strategy behind the Dubai World framework, which has set the tone for all subsequent negotiations between Dubai corporates, creditors and bondholders.
"Dubai still shows a high level of debt," says Zafar Nazim, the senior credit analyst for the Middle East at the US investment bank JPMorgan. "It's an over-leveraged economy at an aggregate level. The restructured debt maturities have been pushed back by five to eight years, but is that enough?
"A 10-year extension would probably be better as this increases the likelihood that asset prices, primarily real estate, recover. Ultimately, this appears to be the best avenue to repay debt, to monetise real estate assets."
The template that emerged from the Dubai World deal involved the repayment of bondholders in full and on time, coupled with the renegotiation of bank loans to a schedule of five to eight years.
The expectation was that economic recovery after the 2009 global financial crisis would allow Dubai asset prices to appreciate, which would give debtor companies leeway to refinance loans or meet repayments through asset sales.
Ongoing global financial instability, especially in the euro-zone countries, and continuing weak property prices in the emirate, now raise the possibility that the Dubai World model did not go far enough.
The risk to the emirate's debt repayment strategy was highlighted last week, when it emerged that creditors to Dubai Group, the financial arm of Dubai Holding, one of the biggest government-related entities, had been told no backing could be expected from the Dubai Financial Support Fund (DFSF), the government unit that has helped indebted companies in the past.
Instead, Dubai Group's creditors were being asked to extend maturities on secured and unsecured loans to between five and 10 years. The unit owes some $6bn to creditors but has no bonds outstanding.
While the development caused unwelcome negative publicity for the emirate, some observers thought the DFSF had taken a rational and prudent decision. "The real question is why it took them so long to reach their decision to back away from Dubai Group. The assets there cannot really be regarded as strategic for the emirate," said a source close to the talks who asked to remain anonymous.
Dubai Group does seem to be a special case within Dubai Holding, the conglomerate owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai. Its website shows a portfolio of holdings in the international financial industry, especially in the Middle East, as well as some industrial and property assets. The values of most will have been hurt by global financial instability and the repercussions of the Arab Spring.
One analyst, who asked not to be named because of the sensitivity of the matter, said there was a distinct possibility Dubai Group would continue to exist as a "zombie entity", with few viable assets or operations and with minimal management.
Other parts of Dubai Holding are performing better. Dubai Holdings Commercial Operations Group, which holds key interests in the Jumeirah and Tecom businesses, has committed itself to paying debts on time, and says it "has no plans to refinance or restructure its outstanding loan commitments".
It recently pledged to make a $500 million repayment this month from internal resources, and is likely to meet about $2bn of bond repayments maturing in 2014 and 2017, a statement from the company said.
Dubai International Capital (DIC), the global investment arm, is in restructuring talks involving $2.5 billion of debt.
DIC has already begun to raise cash via a programme of asset sales. There has recently been speculation its UK budget hotels business Travelodge, bought for £675m (Dh3.9bn) in 2006, is attracting the interest of distressed asset purchasers. The strategy for DIC under David Smoot, the chief executive, is aimed at returning as much capital as possible to the shareholder - Sheikh Mohammed.
Perhaps the most problematic issue Dubai faces is Drydocks World, the ship repair and maintenance business owned by Dubai World, which is liable for $2bn of bank loans maturing this year.
Overall, analysts believe Dubai will get through this year's schedule, which totals nearly $14bn, and can then turn its mind to the $8bn or so falling due next year.
Dubai is on a debt treadmill but has little alternative to grinding away at the liabilities and hoping for global economic recovery.
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