Tuesday, December 1, 2009

The Dubai World saga

From the candlelit dinner table at the Sher and Verdieck home looking out at the Jumeirah and Burj Al Arab Hotel Hotel in Dubai (from our visit in October, 2007).
Ed’s note: We met Anwer Sher, a former banker and longtime resident of Dubai, two years ago when we visited the Emirates as guests of the Abu Dhabi government. He writes a weekly blog Sher View, and we asked him if would share some of his views about his chosen city and its recent developments over the past several days.

The Dubai World saga

The story of Dubai World and its debt is turning into a soap opera that it really does not deserve to be. Some simple facts are being ignored from all sides, which suggests that we are all either naive or simply hoping that somehow the realities of a debt burdened company will simply change by 'talking' their way out of it.

Anwer Sher and Eileen Verdieck.
There are also some essential media mistakes that Dubai government officials have made, making it all the more difficult to handle than it should be.

Firstly, bondholders and lenders always knew that they were lending to a government owned entity without the explicit guarantee of the Government of Dubai. Whether their argument that they didn't need the guarantee to be explicit is really worthy of being tested in a court of law remains to be seen.

As a former banker, I am clear that the sole shareholder of the company doesn't mean all the debts of the company are guaranteed by said stockholder, even though it may place moral responsibilities on him. From a strictly legal point of view, such a guarantee is never explicit unless stated in the debt documents.

This the bankers and the bondholders knew when they lent the money -- even though they may have believed, and would argue the assumption was that the risks of lending were less since Dubai World was a Government Related Entity (GRE).
Driving by more Dubai construction sites along the way from DPC and JH's visit in October, 2007.
On the flip side of the coin, government officials stating that such lending to Dubai World is 'not guaranteed' may well be stating the legal position very accurately. However, they are missing a crucial point of how banks and lenders will see this statement. Banks and lenders will assume that statements in the past three months of support for Dubai World and other GRE's were not meant in the spirit they were made, and with the current statement of disengaging the debt from government obligation, while legally correct, it actually limits Dubai's ability to raise debt in the future.

This is where the much admired PR machine of Dubai has totally failed. In the first place, what was the need for the 'standstill' statement on November 25th? They should have first had discussions with the bondholders and agreed to a 'rollover' or 'extension', and then AFTER coming to an agreement on the matter (or otherwise), made a public statement.

Secondly, while all the uproar is going on, why should a government official go on TV and state the obvious -- “the government has not guaranteed the debts of Dubai World” since this was already known to the bond holders. Why say it again?
The Burj Al Arab hotel. The Jumeirah Beach Hotel with a view of The Burj Al Arab hotel.
The activity in the family-oriented Jumeirah Beach Hotel.
I am often asked what I would do in this situation. As I am not fully aware of the all the financial matters within Dubai World, I am venturing a guess of a strategy:

1. Dubai Government should state that yes it is the shareholder of Dubai World and given it is taking a more direct oversight of the current situation, it is going to issue a White Paper on the status of Dubai World. It should then commission this study.

2. The Government, along with Dubai World management, should issue a statement of its total assets. And if we can assume they are, as some reports have suggested in the past, US$75 billion, then state how much of that is impaired by the current global financial situation.

3. Given that a major problem has been the mismatch of funding to the projects, it should then offer a new program of debt which would be in chunks of three years, five years and seven years. The longer term debt could be supported by the Government of Dubai, or specific assets, or a combination of both.

All short term debt holders could then be convinced through a proper dialogue to participate in the longer term restructured debt, and where possible support could be sought from regional long term fund providers, be they from Abu Dhabi, or Federal Bodies, or even GCC banks.

4. A selective program should be considered, stated now as an intent, to take some parts of Dubai World public through IPO's, and in some cases with the recovery of the world economic situation, to even consider selling them off to repay debt.

5. Create a single platform for communication on the debt issue and related matters, to avoid statements from all over the place.
Looking at the Burj Al Arab from the terrace of Madinat Jumeirah and its surrounding villas.
While this all may sound simplistic, I believe these steps would be better than the situation today. Lenders would be happier to have a true dialogue with the stakeholders rather than talking through the press. I do believe that as confidence is restored through these steps, the overall picture will improve exponentially, and restore much needed confidence in the system.
 

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