Dubai’s debts have always been something of a mystery for investors but since the coronavirus pandemic hit its economy, things have got hazier, some say.
Over the past 12 months, two firms with links to Dubai’s government and its ruler, respectively, have said they would not meet hundreds of millions of dollars’ worth of debt repayments, a rare step in the Middle Eastern business hub, where debts are typically renegotiated and state support is often seen as implicit.
One of the firms, Dubai Holding, the investment vehicle of Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s ruler, told creditors that it would not service a $1.2 billion loan owed by its subsidiary Dubai Holding Investments Group and was prepared to pursue liquidation for the unit, according to a source and a document sent to investors in December and reviewed by Reuters.
The second firm, state-owned property developer Limitless, told creditors last March it wasn’t able to meet payments for a loan worth about $1.2 billion, according to a company document seen by Reuters. It has since been seeking to restructure the debt.
Dubai Holding, which has $35 billion in assets and holdings in property and the hospitality sector, declined to comment on the debts of its subsidiary and repayment plans for other units.
A Limitless spokesperson said its restructuring discussions with lenders were continuing but did not comment further. Creditors to the company included Dubai banks such as Emirates NBD, Mashreqbank and Dubai Islamic Bank. They declined to comment.
The moves by Dubai Holding and Limitless have weakened the assumption that state support is a given, investors say, prompting some creditors to reassess their appetite for and exposure to Dubai-linked debt.
With tens of billions of dollars due for repayment over the next few years, some lenders are selling their exposures or making provisions for future losses, three banking sources have said.
The price of Limitless debt has fallen sharply in the secondary market, according to price sheets reviewed by Reuters. The price of Islamic bonds issued by property firm Meraas, which was incorporated into Dubai Holding last year, has fallen steadily this year, according to Refinitiv data.
Dependent on trade and tourism, Dubai’s economy has buckled under the strain of the pandemic and low oil prices. Forking out to support so-called government-related entities (GREs) would be a further strain on the public purse.
“The recent defaults have highlighted long-standing concerns about high public and private sector leverage against a backdrop of low growth and a very weak real estate market characterized by chronic over-capacity,” said Cedric Berry, a Fitch analyst.
“In itself, a policy of more limited support is positive for the government’s finances and creditworthiness. However, there is limited transparency on the GREs’ balance sheets and the challenging economic environment has increased the risk that some entities could still require financial support, putting pressure on government finances.”
The Dubai media office did not respond to Reuters queries on Dubai’s indebtedness, Dubai Holding’s exposures or the city state’s plans to tackle the liabilities of state entities.
The United Arab Emirates Central Bank, asked whether it was encouraging banks to make provisions for outstanding Dubai debt, declined to comment.
“A TOUGH LINE TO DRAW”
In the case of Limitless and of Dubai Holding Investments Group, neither the state nor Dubai Holding had any contractual obligation to pay creditors.
Dubai Holding was only responsible for interest payments on the $1.2 billion loan and at its maturity it told creditors that it was “prepared to pursue an insolvent liquidation in the absence of any feasible alternative,” a document sent to investors in December showed.
Dubai’s government explained its approach to GREs in the prospectus for a rare public sale of sovereign debt last year. The sheikhdom said that if such companies were unable to fulfil their debt obligations, the government may, “at its sole discretion, decide to extend such support as it may deem suitable.”
But some investors have been working off the basis that there was an implicit government guarantee, two bankers said, a sentiment reinforced by Dubai’s support for Emirates Group, the state-owned airline, during the coronavirus crisis.
The flag carrier was given a $2 billion equity injection by the state last year. An Emirates spokeswoman told Reuters that none of its debt has a guarantee by the government or by the Investment Corporation of Dubai, its sovereign wealth fund.
Investor confusion has been compounded by the fragmentation of Dubai’s debt. Some sits under the government, some under its sovereign wealth fund, and some under the umbrella of Dubai Holding, the investment vehicle of Dubai’s ruler - a major force in developing the local economy.
“It comes back to the same old argument, which is where does the ruler in his private capacity stop and the obligations of the emirate start. When you talk about an absolute monarchy, it’s a tough line to draw,” a banker at a Dubai lender said.
Some of the debts owed by Limitless, the property developer, were trading at 20 cents on the dollar in December, down from 30 cents a few months earlier, according to secondary loan trading price sheets reviewed by Reuters.
Banks’ provisions for bad and doubtful debts in the United Arab Emirates amounted to nearly $42 billion as of November last year, up from $36 billion at the end of 2019, according to central bank data.
Non-performing loans are expected to account for 7.6% of total loans in 2020, up from 6.5% a year earlier, the Institute of International Finance has estimated.
A dearth of statistics makes it difficult to get a full picture of Dubai’s financial situation. Its sovereign bonds are not rated by credit rating agencies and the city state has mostly used private placements and bilateral loans to raise capital.
The government said in August that its debt levels were equivalent to around 28% of 2019 gross domestic product, but that figure goes up to over 100% of GDP, according to estimates by research firms and ratings agencies, if debt raised by GREs is also taken into consideration.
In its bond prospectus last year, Dubai’s government said it had no official estimate for GRE debt.
London Based Capital Economics has estimated that before the end of 2024 $38 billion of Dubai GRE debt is due for repayment, much of it in 2023.
Many of the debts date from the 2008-09 financial crisis. Back then, oil-rich Abu Dhabi gave Dubai a bailout helping its neighbour to support its state-controlled companies. Debts were renegotiated and extended.
This time around, no help has been forthcoming.
Abu Dhabi and Dubai were in talks last year to prop up Dubai’s economy by linking up assets in the two emirates, sources told Reuters at the time. Dubai denied the report.
Abu Dhabi did not respond to a request for comment.
A perception that Abu Dhabi would, however, support Dubai if required is factored into the price of Dubai sovereign debt, according to traders.
Bonds sold by Dubai last year which are due to mature in 2050 are currently trading at a premium of just over 1 percentage point over Abu Dhabi’s paper with the same maturity, despite Abu Dhabi having a top credit rating and much larger financial wealth.
“Dubai benefits from perceived backing from Abu Dhabi, which is still an extremely strong credit, and could choose to provide support if needed,” said Richard Briggs, investment manager at GAM.