The Dubai government is to ask creditors of Dubai World, the state-owned conglomerate behind the emirate's massive property expansion, for a standstill on all its liabilities as accountants are appointed to restructure the debt-laden group.
Today's announcement sent the cost of insuring Dubai's debt against default soaring, as fears mounted about the stability of the state's finances.
Dubai World, which is struggling to pay off close to $60 billion (£36 billion), is seeking a six-month standstill on all its liabilities.
At the same time, Deloitte, the accounting firm, has been appointed to oversee restructuring of the group, the Dubai government announced today.
If approved by creditors, the delay defers until May 30 next year the repayment of a $4.05 billion bond issued by Nakheel, the troubled property developer which is a subsidiary of Dubai World and is responsible for several of Dubai’s flagship construction projects, including the Palm and World island developments.
Dubai and its government-related businesses have run up over $80 billion of debt through short-term borrowing before the economic crisis, much of which is due to be repaid in the next three years.
The emirate has struggled this year following a collapse in the local property market, with prices estimated to have fallen by 50 per cent in 12 months. Companies working on many of the emirate’s flagship real estate and infrastructure projects have been forced to accept cuts of up to 50 per cent on the value of their contracts and many remain unpaid.
In total, Dubai and its government-related businesses have a further $13 billion of debt maturing next year, rising to $19 billion in 2011.
The government today raised a further $5 billion through a bond issue, as part of a $20 billion bond programme launched earlier this year, of which $10 billion was taken up by the United Arab Emirates central bank in Abu Dhabi — in effect, a federal bailout of the troubled emirate.
Dubai has drawn down only $1 billion, split between National Bank of Abu Dhabi and Al-Hilal Bank. Added to a $1.93 billion sukuk (Islamic bond) issued by Dubai in October, this is not sufficient to repay the Nakheel bond.
The second $10 billion had been expected within days to cover the Nakheel bond. There has been no indication from the Dubai government as to why Abu Dhabi is only prepared to subscribe to $5 billion or why only $1 billion has been drawn down.
Fahd Iqbal, GCC strategist for the Egypt-based investment bank EFG Hermes, said: “Obviously it is a negative. Just how bad things get depends on more information being provided, because at the moment there is none, and what happens in May when [Dubai World] has even more debts to make?”
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