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Furious investors warn troubled Dubai it will 'never raise a penny again'

Date: Monday, November 30, 2009
Author: Elena Moya, David Teather, Heather Stewart, The Guardian

Hopes Abu Dhabi will ride to the rescue of troubled state as experts fear crisis could plunge world back into recession

Furious bondholders have arranged emergency talks with Dubai officials this week in an effort to get some clarity on the financial health of the state-owned company Dubai World, which caused widespread panic on world markets last week when it asked creditors for a six-month standstill on debt repayments.

A conference call has been organised by the New York-based hedge fund QVT Financial, after an attempt last week was abandoned when the telephone system collapsed under the weight of calls.

Investors are angry that the announcement was made at the start of the Islamic Eid and US Thanksgiving holidays, leaving them in the dark for days. "They won't be able to raise a penny again from the international investment community," one hedge fund manager said.

Dubai World, which owns assets including the former British ports business P&O, as well as luxury store Barneys in New York and was the main developer behind some of the state's grand property schemes, stunned markets with the announcement last Wednesday. The company is shouldering some $60bn (36.5bn) in debt and was due to repay around $4bn next month. There are fears that the debt crisis in the towering city state could fracture the fragile investor confidence that has been built in the past few months and plunge the world back into recession.

As well as putting the frighteners on stock market investors who had been betting on a "V-shaped" bounce out of recession, Dubai's crisis has turned the spotlight on other countries that could struggle to repay their hefty debts.

Danny Gabay, director of City consultancy Fathom says Latvia, Greece, Ukraine and Hungary, which all face severe fiscal problems, are "on the front line," in the battle to avoid a government debt crisis in the future.

Vulture funds are circling Dubai and buying up distressed bonds, which could put further pressure on Dubai World to dispose of assets in a fire sale.

Initial fears of a meltdown appeared to be receding on Friday, with the FTSE 100 rising 51.6 to 5245.7, although the Dow Jones Industrial Average fell 1.5% to 10309.9. "I don't think the collateral damage is going to be that great," said Jeffrey Saut, chief investment strategist at Raymond James. "I think balance sheets have healed enough to withstand a shock like this."

British banks appeared to be most at risk if Dubai World cannot pay its bills. HSBC and Standard Chartered could face losses of $611m and $177m respectively, according to early estimates from analysts at Goldman Sachs.

Attention will now focus on neighbouring Abu Dhabi, the oil-rich emirate, which is under pressure to mount a bailout. Analysts were this weekend speculating on what it might demand in return, including profitable assets such as the ports division, DP World, and the airline Emirates. Abu Dhabi is virtually debt-free and has a sovereign wealth fund with up to $500bn in assets.

The crisis in Dubai will also put pressure on the region to provide more transparency to investors. "The lines between public and private business have always been blurred in the Middle East, the irony is that it takes a crisis like this to reveal what commitment, guarantees and cross liabilities there are," said Jan Randolph at IHS Global Insight.