Speculation by Bank of America Merrill Lynch that Aldar Properties now needs to raise an additional $2.7 billion in debt is a reminder that Dubai was not the only emirate to pile on debt in the boom, albeit the $42.3 billion estimated to be repayable by Dubai over the next two years dwarfs this amount.
Analysts do not expect a repeat of the Dubai debt crisis of almost a year ago when it looked as if there might be a default on Nakheel bonds. Both emirates have learnt from that PR disaster and relations between the two have seldom been on a better footing.
UAE unity rules
Rather than disunite the United Arab Emirates there has been a new awareness of collectice self-interest, or to be more frank a realisation that Dubai and Abu Dhabi sink or swim together.
How difficult then is the task that lies ahead? Dubai raised a $1.25 billion bond on international markets at the end of September, and both Emaar Properties and Dubai Electricity and Water have also raised money in bond markets.
But then let us not forget the financial position of Abu Dhabi, arguably the world’s richest city. There is $450-650 billion in its sovereign wealth funds; $3-4 trillion worth of oil in the ground which makes the average family worth $100 million plus; and the cash flow from the rising oil price.
The anomaly was surely that Dubai and Abu Dhabi used to operate entirely without debt in the past, simply using oil revenues and retained business profits to fund investments in infrastructure. Both cities could have grown even faster by borrowing and took a very conservative approach.
More Abu Dhabi bond issues
To refinance the UAE is surely not really a problem with all that wealth to hand. Abu Dhabi needs to issue bonds to recapitalize the debts. That is what happened in the Dubai debt crisis a year ago.
But as analysts point out there will always be strings attached, and clearly Dubai would like to keep as much as it can. However, there may come a tipping point when it is obvious that the objective of getting the show back on the road quickly supercedes a longer term outlook, or indeed becomes imperative to secure the long-term.
The upcoming $42.3 billion in short-term debt will surely focus attention, as has the alleged $2.7 billion funding gap has at Aldar Properties. For wiping the slate clean after the recent boom would be in the interest of all parties, and it will happen sooner or later.
Ironically while Bank of America Merrill Lynch has highlighted Aldar’s problems, the bank itself is the subject of intense speculation about the viability of its own balance sheet (click here). These are still difficult times for financial markets and only the players with the strongest financial backing will ultimately survive.
Posted on 08 November 2010
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