UAE stocks to rally on $23.5bn Dubai debt deal
Posted on 11 September 2010 with 2 comments from readers
UAE stock markets are set to rally after the announcement that 99 per cent of creditors have approved a $23.5 billion debt rescheduling deal for Dubai World against a background of improving global equity markets. However, the rally will be short lived if global stock markets take another plunge on renewed fears about the US economic recovery.
The Dubai announcement caught commentators on their Eid holidays and came rather earlier than expected. It paves the way for a formal sign-off over the next couple of weeks but is effectively a done deal.
Done deal
‘This agreement formalises a strong consensus around a fair and balanced restructuring proposal and is a key step towards putting Dubai World on a sound and stable financial footing, whilst enabling it to realise the full potential of its underlying businesses,’ said Sheikh Ahmed bin Saeed Al Maktoum, chairman of the Dubai Supreme Fiscal Committee who has been leading the debt negotiations.
Earlier calculations suggested the deal will cost the banks around $1 billion in lost interest payments. Dubai World’s property company Nakheel will be separated from its parent, and the potential sale of the port operator DP World underwrites the deal, although Dubai will clearly hope to avoid selling more shares in this prized asset.
The depressed Dubai Financial Market should be an instant winner. Stocks rallied 1.5 per cent on Wednesday just before the close for the Eid holiday, and the post-Ramadan rally should be much stronger unless something happens to weaken the recent strength of global markets.
For local business the Dubai World deal is also a boost to confidence and brings to an end the 10-month long Dubai debt crisis that started with the suspension of payments, although it actually ended more quickly with Abu Dhabi stumping up $20 billion in low-rate bonds to refinance Dubai in December last year.
More debt crises?
Of course, Dubai is not totally out of the woods just yet. The IMF estimates the total debt to be $109 billion. Dubai Holding postponed payments on a $555 million loan again only last week, and is another entity with debt rescheduling to conclude.
But the biggest debt mountain was Dubai World. This resolution does remove a major obstacle to the refinancing of Dubai after the sudden stop in October 2008 when the credit crunch of the global financial crisis brought the Dubai real estate boom to a spectacular end.
Dubai can now be classed as a city in recovery mode and not one that might be tipping into terminal decline. That is a major change and justifies a stock market re-rating.
2 Comments posted by readers:
“the potential sale of the port operator DP World underwrites the deal, although Dubai will clearly hope to avoid selling more shares in this prized asset.”
Have they already sold a stake in DP world? I thought Dubai’s intention from day one was to ringfence the most valuable asset in DW’s porfolio (DP world). When did this happen?
Ed Note: Yes they did an IPO for around 20% in the boom times for $1.30 a share (versus under 50 cents today) and raised $5 billion – that almost paid for the $6 billion acquisition of P&O. But under the terms of the new deal with the banks there will be a clause stating that assets will be sold to cover the new debt agreement if necessary – this underwrites the new deal but if DW pays back on schedule their will be no mandatory sales. In practice DW probably will need to sell assets to meet loan payments. More stock sales from DP World look very likely – but they would clearly like to do so when the stock is trading higher.
Debt deal lol.. Just last week they were unable to make the minimum repayment on schedule and now that they renegotiated to making the minimum payment on just the interest we rally and consider this as great news?? lol..
The UAE is long from being out of the hole. The UAE does have money to pay its debts but the question is would the government pay this money off and tie up their cash when they can use the money to invest else where instead of dumping more money into the real estate sector that does not look like it will see daylight for years to come??
Currently, I think they will pump stock prices up in the UAE.