From Times Online
November 28, 2009
By Rhys Blakely in Dubai

Abu Dhabi is poised to come to the aid of Dubai’s debt stricken-businesses, but only on a “case by case” basis, senior bankers an officials said today.

The Dubai Government sent global markets into a tailspin this week after it asked creditors of Dubai World, the state-owned conglomerate behind the city state’s building boom, for a six-month standstill on $80 billion of debt repayments.

The move kindled fears that the world economy is yet to rid itself of toxic debt, and may even succumb to a fresh downturn in a “double dip” recession.

Oil rich Abu Dhabi, which has the world’s largest sovereign wealth funds, thought to be worth as much as $700 billion, could easily bail out Dubai, but is thought to be unwilling to pour more money into its neighbour’s beleaguered property sector, which has buckled under the weight of a series of half-finished grand projects.

“There is no such thing as a free lunch,” Yasser el-Mallawany, the chief executive of EFG-Hermes, Saudi Arabia’s largest investment bank, told The Times. “I think we will now see a welcome restructuring [of Dubai’s assets], done on a case-by-case basis.”

That view chimed with comments made by Abu Dhabi officials. Some analysts believe that a tailored rescue package is also likely to offer sweeter terms to foreign investors than to those based in the UEA.

It is widely thought that Abu Dhabi does not want to pour more of its petrodollars into companies whose business models have badly broken down in the wake of the global credit crisis, such as Nakheel, the property developer behind the partially-completed man-made Palm Islands in the Gulf, which is owned by Dubai World.

But Dubai’s portfolio of assets also concerns solid going concerns, such as DP World, the fourth-largest ports operator across the globe. DP World has said it is ringfenced from the debt crisis, but analysts say that the relations between Dubai Inc’s companies are hazy and that contagion could yet spread within the group.

However, with no official statement coming from Dubai or Abu Dhabi, investors were again fretting on Saturday.

With details emerging of the meetings between the two city states, there was speculation that Abu Dhabi was pushing Dubai to accept onerous terms in return for a bail out – possibly calling for it to give up control of a prized asset such as Emirates, the Dubai airline.

If Abu Dhabi were to overplay its hand, Dubai could still be forced to embark on a global firesale, analysts said. The first parcel of Dubai debt to mature is $4 billion in Islamic bonds issued by Nakheel, which was due to be repaid on December 14. It is understood to be in the hands of local banks, whose balance sheets have been already badly ravaged by a property market slump.

Bankers believe that fact will pile pressure on the Dubai and Abu Dhabi Governments to reach a resolution before the banks open after a four-day holiday, on Monday morning.

“The Governments can never allow a run on the banks,” Mr_el-Mallawany said.

Another local banker said: “It’s now all about perceptions. If a bank goes bust, the region will be a no-go area for years.”

Most of the December 14 maturity debt came into the hands of local banks after they increased positions under Government pressure when foreign banks, hedge funds and other investors retreated in the wake of the credit crisis, local market players said.

According toanalysts, they were ill-equipped to step into the breach. The health of Dubai’s banking system has been a matter of concern for some time, with some foreign analysts voicing concerns that balance sheets did not reflect the true scale of losses suffered because of property crash.

Some local bankers yesterday welcomed the prospect of a purge.

S&P has warned of possible credit downgrades to Emirates Bank International, National Bank of Dubai, Mashreqbank and Dubai Islamic Bank in the wake of the Dubai World standstill.

Mohamed Damak of S&P said: “The deteriorated economic environment,including the fall of real estate prices, has already started to weigh on the financial profile of these banks.”

Abu Dhabi Commercial Bank is also thought to be heavily exposed to Dubai. Even if Dubai pays of the December maturity, there are serious doubts over how it will find the estimated $20 billion it needs to repay up to 2011.

Analysts are especially concerned that the Emirate has now destroyed its reputation among lenders, who had been led to believe the Government would honour “Dubai Inc’s” liabilities

Stuart Culverhouse, Chief Economist of Exotix, a boutique bank that specialises in the Middle East, said: “They have opened Pandora’s box and, no matter what happens next, have created a monster they may not be able to control.”

Credit Suisse, the investment bank, believes that European banks are exposed to half of Dubai’s $80 billion debt pile, with Barclays and Royal Bank of Scotland (RBS), which is 70 per cent owned by the taxpayer, believed to have invested heavily in the region.

In a recent note, JP Morgan analysts pegged Standard Chartered’s exposure to Dubai debt at $7.8 billion, HSBC’s at $17 billion, Barclay’s at $3.6 billion, RBS at $2.2 billon, Citigroup at $1.9 billion, and BNP Paribas at $1.8 billion.

However, JP Morgan said that worries over global banks’ exposure to Dubai had been overdone, since only a small amount of the total loans were set to mature in the near term.

The Daily Telegraph reported this morning that Rothschilds, the investment bank, had been appointed to help restructure the assets of Dubai World. Paul Reynolds, head of Rothschild’s Middle East advisory operations was asked to work for the Dubai government with Aidan Birkett of Deloitte, the accountants, who was appointed on Wednesday.