Concerns about Dubai’s potentially crippling default on enormous debts to global creditors have rattled investor confidence across the oil-exporting Gulf region, prompting corporate issuers in the region to postpone or cancel bond issuances (e.g. Gulf Investment Bank) in the wake of the news.
We estimate Dubai’s debt upward of $80 billion. At the heart of the issue is whether state-run Dubai World, which holds more than $50 billion in liabilities, will be able to pay back its creditors. The conglomerate that runs flagship Dubai companies such as DP World, asked banks this week for a “standstill” agreement as it negotiates to extend maturities of debt, including the $3.52 billion in Islamic bonds due next month from Nakheel, the famed palm tree island developer. The bond at the center of Dubai’s restructuring efforts, the December 2009 Islamic bond from Nakheel, has lost a third of its value since the announcement, the price having collapsed to 72 points from 111 beforehand.
Dubai’s announcement, which happened on Wednesday, sent shockwaves through European equity markets on fears that many banks could face massive writedowns on Dubai debt. Currency and bond markets across the globe were also exposed to developments that have become the source of the biggest destruction of confidence in Dubai’s history. To make matters more interesting the ports operator, DP World announced that it will be excluded from the debt standstill and restructuring of Dubai World and its subsidiaries. The company, the world’s fourth-largest ports operator, is 77 percent owned by Dubai World. DP World is considered the best asset within Dubai World. We think this move is clearly to differentiate the good assets of Dubai from the bad ones, and DP World is a good asset.
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