Darkness in Dubai Inc

“The Sun Never Sets on Dubai World”,is its tagline. The investment portfolio of Dubai World,owned by the Dubai Emirate and one of the largest holding companies in the world,extends across 100 different cities in the world. It is spread across a wide spectrum of strategic industries and sectors ranging from ports management,property development,hospitality and tourism,free zone operations,private equity investment,retail to sectors as diverse as aviation,commodities exchange and financial services. Dubai World owns and invests in companies that are the driving force behind iconic property projects such as ‘The Palm’,‘The World’ and DP World which is the 3rd largest marine terminal operator in the world.

How did it get into a debt trap?

The company ia a classic example of huge borrowing beyond its means. In short,the company borrowed a huge amount from banks to finance its various projects during the 2005-08 boom period but failed to come up with a repayment plan. The global crisis of 2008 triggered the crisis and it never recovered from the blow. Dubai accumulated $80 billion of debt by expanding in banking,real estate and transportation before the financial markets were hit by the global crisis. Dubai World accounts for $59 billion of these liabilities and it doesn’t have money to repay this debt. Dubai suffered the world’s steepest property slump in the global credit crisis as home prices fell 50 per cent from their 2008 peak.

Where does the company stand now?

According to Dubai’s Department of Finance,the company will ask creditors for a “standstill” agreement as it negotiates to extend maturities,including $3.52 billion of Islamic bonds due December 14 from its property unit Nakheel PJSC. Abu Dhabi is also trying to salvage the company by arranging funds. However,rating agencies Moody’s Investors Service and Standard & Poor’s cut the ratings on several state companies,and said they may consider the plan a default. The company had total assets of $99.6 billion at the end of 2008 and total revenue of $14.2 billion.

Why are financial markets and banks worried?

Lenders,mainly European banks,around the globe have lent around $40 billion to Dubai World. Any default by Dubai World will put these banks,which are yet to recover fully from the recent global crisis,in a tight spot. This will also affect other companies in the region and credit rating will take a blow. Stock markets are worried over bank defaults and the big blow to Dubai’s reputation as an international finance centre. Indian investors are also worried about decline in remittances and loss of jobs.

Will India be affected by the Dubai crisis?

Indian banks and companies don’t have a big exposure to the company. If Dubai World sinks,it could put its arm DP World,the container operator in major ports in India,into trouble. Moreover,any damage to the company could affect other firms in the region and many Indian expats who work in Dubai — Indians constitute nearly 40 per cent of its population — may find it tough to retain their jobs. This means remittances to India could decline. But the situation is not that bad and if a bailout is worked out,the company will survive.