Dubai, United Arab Emirates

More than two years after one of its showcase companies announced a "standstill" on its loan repayments, signaling the end of a real estate-fueled boom, a mountain of debt continues to cast a long shadow over Dubai's economy.

Moody's Investors Service brought the extent of the problem home in a report released Tuesday that sent local share prices falling. The credit-rating company estimated that even after two years of restructuring, refinancing and help from the neighboring emirate of Abu Dhabi, Dubai's government and its state-owned companies owe some $101.5 billion.

In fact, total debt may be higher because of the difficultly of getting data on the bank debt of closely held companies, Moody's said.

"Although we believe a substantial portion of this debt has been captured in our analysis, the total amount of debt is likely to be higher than the amount we have identified. In particular, we note that off-balance-sheet debt in special-purpose vehicles is difficult to estimate and capture," David Staples, Moody's managing for corporate finance, said in the report.

While the biggest repayment hump doesn't arrive until 2014, Dubai Inc., as the network of state-owned entities is popularly known, must repay some $13.8 billion in bank and bond debt from the fourth quarter of 2011 through the end of 2012. Another $11.2 billion is being restructured. Of that, Staples pointed to some $3.8 billion owed by three state-linked entities that looks especially problematic.

With little of the oil resources other Gulf countries enjoy, Dubai transformed itself into a glittering real estate, finance and tourism hub in the space of a few years with borrowed money. But when the global financial crisis hit in 2008, Dubai's borrowers found their cash-flows as well as access to new loans constrained. In November 2009, Dubai World, a holding company whose interests span from ports to luxury real estate, set off a debt crisis that drags on till today by announcing it wanted to delay its repayments.

The pint-size emirate has struggled to emerge from under its debt pile, which exceeds its 2010 gross domestic product of about $80 billion by a wide margin. But its efforts have been undermined by a huge overhang of unsold real estate and declining house prices. The International Monetary Fund expects economic growth to pick up to 2.8 percent this year and to 3.2 percent in 2012, but those rates pale in comparison to the 8 percent annual rate it chalked up in the boom years.

Nakheel, a developer that was forced to erase some $21 billion from the value of its real estate assets, reported a first-half net profit on Monday, citing "a relatively more stable real estate market in Dubai." Nakheel was bailed out to the tune of $16 billion by Dubai, which is now owned by the government, but it owes another $4.8 billion, Moody's estimates.

Dubai saw 1,603 real estate deals in the first 10 months of the year, according to Dubai Land Department. That was up from 2009, when the market hit rock bottom, but in only a fraction of the 5,363 during the same period in 2008 before the crisis hit. While home prices have stabilized, an enormous overhang of properties coming onto the market is likely to send them down again, say analysts.

Nevertheless, Daniel Broby, chief investment officer of the London-based Silk Invest, said he isn't concerned about Dubai Inc.'s near-term outlook. He said the repayments coming due in 2012 could probably be rolled over, with a good prospect that any shortfall might be covered by Abu Dhabi.

"It's a lot of money, but it's not a lot when you think of challenges ahead. I don't think it's too much of a hurdle," Broby told The Media Line. "Certainly 2014 looks like a real hurdle they have to get over."

Moody's suggested in its report on Tuesday that the emirate has exacerbated its debt hangover by failing to reduce it by selling assets. Instead, the government has pursued a strategy of repaying bondholders in full while negotiating loan extensions with banks. As a result, its repayment bills remain substantial and some companies - Dubai Holding Commercial Operations Group, Jebel Ali Free Zone and DIFC Investments LLC by Moody's estimate - face "execution risk" in trying to meet their obligations.

On Monday The Financial Times reported that Dubai officials are weighing the prospect of restructuring some bonds next year to meet the next round of debt repayments. While the British newspaper said the emirate is also pursuing other options, including raising $2 billion from liquid local banks, the news combined with the Moody's report gave the shivers to investors.

Shares on the Dubai Financial Market fell the most in five weeks on Tuesday, with the DFM General Index down 1.2 percent. Emaar Properties PJSC, the developer of the world's tallest skyscraper, slumped 3.6 percent, Dubai Financial Market by 2.1 percent, and Drake and Scull by 1.7 percent.

The Financial Times quoted an unnamed official as saying that government funds might buy the distressed assets from state-related entities at higher-than-market valuations to help them generate cash. The government may make use a law that allows borrowers to restructure their bonds if they win backing from two-thirds of the holders

The Moody's report also heightened investors' concerns by suggesting that the government would only back less than half the $68.6 billion of Dubai state-owned corporate debt. Staples and his team divided the debt pile into three categories, including one of companies that are unlikely to need any support and companies Moody's believes Dubai's government has deemed "strategic" and are likely to get assistance.

Among the "non-strategic" borrowers are companies like Dubai World, Emaar Properties and Nakheel, which have interests overseas or in speculative real estate projects. The report estimated their outstanding debt at $34.8 billion.

 

 

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