Critical test of Dubai’s credit worthiness – Dubai `s 80 Billion Dollar debt pile

original source online WallStreetJournal by Maria Abi-Habib and Stefania Bianchi

Dubai will crank up efforts this week to tackle its $80 billion debt pile with senior officials heading to Asia to meet potential investors amid reports that one of its most indebted companies has repaid a $1.2 billion bond ahead of schedule.

Top officials from Dubai’s Department of Finance will meet fixed income and Islamic investors in Hong Kong, Singapore, London, Dubai and Frankfurt starting Thursday ahead of possibly selling more debt this year, according an invitation sent to bankers and seen by Zawya Dow Jones Monday.

An external spokesman for the department said the roadshows are part of “ongoing investor communication” but bankers suspect the meetings could be an early sign that Dubai may be preparing to issue the second half of its $20 billion bond program launched in February to support its economy and embattled companies.

“This will be the first time investors hear the Dubai story from officials post-crisis,” Abdul Kadir Hussain, chief executive of Mashreq Capital told Zawya Dow Jones. “How this story is received will determine how successful Dubai will be over the next three to five years.”

At the height of the global financial crisis, the Abu Dhabi-based central bank of the United Arab Emirates supported Dubai by underwriting the first half of its planned $20 billion bond program to bail out the sheikdom’s struggling companies and economy.

Recently, Dubai officials including Omar bin Sulaiman, the head of the Dubai International Financial Center, have said they expect strong interest from private investors for the eagerly awaited second $10 billion bond.

Mohamed Alabbar, who helps oversee a committee evaluating the impact of the global credit crisis on Dubai, told CNN earlier this month that the emirate may raise the additional $10 billion by November.

The investor meetings due to start in Hong Kong on Oct. 22 are the latest sign that Dubai and its government-owned companies are trying to dig themselves out of an estimated $80 billion debt pile, most of which was incurred during the emirate’s property, tourism and logistics boom.

According to Standard & Poors, Dubai has almost $5 billion worth of debt maturing between September and the end of the year. The biggest share of this debt is held by Nakheel, a unit of government-owned Dubai World. The company has a $3.5 billion Islamic bond maturing December. The bond, which will be pumped into Dubai’s Financial Support Fund, is seen as a critical test of Dubai’s credit worthiness.

“The Financial Support Fund is in need of further resources to fulfill its mandate of supporting Dubai’s government related entities, many of which face heavy debt repayments in the coming three years,” said Farouk Soussa, head of Middle East government ratings at S&P.

PAYING DEBTS

A report Monday in Middle East Economic Digest said Nakheel had repaid a 4.4 billion U.A.E. dirham ($1.2 billion) securitized bond issued in January, one month ahead of the scheduled repayment deadline of Nov. 15.
The repayment made on Oct. 15 will come as a comfort to many investors in Nakheel, and especially those concerned about Nakheel’s December sukuk. A Nakheel spokesperson declined to comment when contacted by Zawya Dow Jones Monday.
Nakheel’s bond repayment came on the same day that government-owned conglomerate Dubai World announced that it completed a major restructuring.

The move will help the firm save $800 million over the next three years and ease a small part of the near $60 billion of liabilities on its books. The term liability refers to a company’s legal debts or obligations arising from its business operations.

Earlier this month, Dubai Holding, a conglomerate controlled by the emirate’s ruler, paid back in full a $300 million loan belonging to its Sama property unit. There are also signs that Dubai is repaying some of its outstanding bills to construction contractors.

On Monday, U.K. Trade Minister Mervyn Davies said that debts owed to British contractors in Dubai have reduced, but payments remain outstanding.

“I think it has improved, but it’s been a sensitive issue, and it is important that Dubai companies pay their debts,” he said.

The U.K.-based Association for Consultancy and Engineering, which represents about 800 British construction firms, said in May it was tracking approximately GBP400 million in unpaid fees for building in the emirate.

(Natasha Brereton in London contributed to this story.)