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Ten Little Known Dubai Debt Facts


We learn that the “banks”, and presumably their customers who bought bonds issued by some of the entities currently being administered by Dubai World (note I did not say owned), will be sitting down in the near future to have a little chat about the “holidays”.


We also learn that RBS, the UK State-Owned Bank, is one of the main foreign creditors of the current object of everyone’s attention, the developer Nakheel.


There is a saying that if you owe a bank $100,000 you have a problem, but if you owe it $5.6 billion, they have a problem. That’s particularly true if the bank doesn’t know exactly who it is that owes it the money, what collateral it can collect in the event of a default, or even how to actually collect on any collateral (if it finds any).


In such circumstances, faced with the option of “shutting-up” and getting in the queue, or creating a fuss, well you have two choices.  


Ah the cruel unjustness of it all!


Sentiments of the foreign media were neatly encapsulated in the leader in the Financial Times last Saturday which concluded:


Abu Dhabi should give whatever help is needed to bring this episode of incompetence to a close. Abu Dhabi allowed it to be believed that it was backstopping Dubai, so it should make good on its promises. This will require a public guarantee of Dubai’s debts – and soon. The reputation of the whole UAE depends on it.


Strong words indeed, did you spot the deliberate mistakes?


How about some facts?


1: Nakheel is a private shareholder limited liability company.


2: It is not clear who the main shareholders are, not that it really matters since it is a limited company.


3: It’s not crystal clear either where Nakheel is registered although it’s probably in the Jebel Ali Free Zone. A clue there is that foreigners can own property developed by Nakheel outright which they can’t in the parts of UAE that are exclusively governed by UAE Federal Law, also as some employees of Nakheel are finding out, labour contracts issued by Nakheel are not enforceable under UAE or Dubai Labour Law.


4: In that respect The Jebel Ali Free Zone is in some ways not “part” of the United Arab Emirates, a clue to that is it’s full of companies that are considered “foreign” under UAE Federal Law, except their employees are allowed to live in UAE and to travel from the zone to UAE without any problem.


5: One thing for sure is that Nakheel is not a Dubai Government entity; if it was its activities would be mentioned in the Dubai Government Statistical Abstract; and it’s certainly not a UAE Government entity (ditto). So all that stuff about “state owned” is just nonsense, as was recently explained by an official from the Dubai Government.


6: It’s probably wise not to assume that Dubai World has shares in Nakheel, it’s more likely Dubai World has an agreement with Nakheel shareholders (or a power of attorney), to manage the affairs of Nakheel.


7: Since most of the property in the process of being developed by Nakheel was sold off-plan, it’s hard to figure out exactly what assets Nakheel has that might be worth taking charge of if there was a judgement to say that Nakheel’s bonds were in default.


8: In that regard Nakheel’s main asset would appear to be a concession from the Government of Dubai that permits it to develop real estate in a “free zone” and sell that to foreigners. Nakheel might however have a lot of liabilities, both to develop and hand over real estate which it has contracted to do (and received advance payments for), and also maintenance and warranty liabilities relating to properties it has already developed and sold.


9: It’s also not crystal clear either what Court would have jurisdiction  if for example 25% of the bond holders ganged up to force the bonds to be declared in default; as they are of course perfectly at liberty to do in a UK or a US Court, the issue would be what would they do next?


10: They could certainly go to Dubai Court, which is incidentally by far the most efficient and transparent courts in the UAE (of course all the proceedings are in Arabic), but that might turn out to be a lengthy process, particularly if there is plenty to argue about. Typically contentious cases go through two appeals before they are settled, I’ve heard of that whole process taking three years.


I imagine there would be plenty to argue about, leaving aside the other creditors who technically own most of what Nakheel has built (or half-built) so far, there is the complication of the Islamic Finance element. It’s common for Courts in UAE to “forgive” the “interest” part of such loan agreements that go wrong, so in such cases you are only ever going to get the principal (less any interest already paid).


Of course you could argue that the bonds were Sharia compliant, the problem with that is although that may be the case, all that says is that an institution (or individual) who wants to only invest in Sharia compliant instruments, will be comfortable investing. That doesn’t mean that if the dispute ends up in Court the defendants can’t come up will a hundred scholars who will testify that the bond was in fact not Sharia compliant (and that the poor luckless Nakeel was hoodwinked by nasty foreign banks who tried to “bend the rules”).


The could try the DIFC Courts which are the courts for the new financial centre and use a completely different legal system to the UAE Federal Courts (it’s based on UK Common Law), but that might be tricky, both parties would need to agree. There is of course arbitration, it depends what was written on the bond.


So what “should” Abu Dhabi do?


Abu Dhabi could of course just pay off all the debts, it can afford to do that, although whether the “estimate” put out by some foreign media of the assets of the Abu Dhabi Investment Authority of $900 billion is correct is another story (RGE reckons its about $300 billion).


That is of course a nice idea, and then everyone could live happily ever after. That might happen, but then again it might not, particularly since the connection between the Abu Dhabi Government and Nakheel is tenuous to say the least.


For example the line of reporting between Abu Dhabi and Dubai is via the UAE Federal Government and any payments authorised by Abu Dhabi would be channelled via that body.


So, if I got this right, the logic is that the UAE Federal Government would use money from Abu Dhabi to bail out or rescue an entity that operated outside the jurisdiction of the UAE Federal Government?


That’s possible, but probably not very likely.


In addition it might be worth remarking that the late Ruler of Abu Dhabi was very much against the idea of selling land in the UAE to foreigners, and just because a way was found to wriggle around that, does not guarantee that the current Government of Abu Dhabi is going to be overly sympathetic to foreign banks that lent money to a somehow  “Non-UAE” private shareholder company that did just that.


They might for example take the attitude “well we didn’t really approve that anyway” (and that is public record), “and the only reason Nakheel could go ahead and do that was because you lent them the money”.


So you lent them some money, they didn’t pay it back, sorry to hear that”.


“But what’s that got to do with us? Why not do what everyone else does in such circumstances, either negotiate, or go to Court, and by the way….good luck”.


And with regard to the notion that the Abu Dhabi Government somehow signalled that it would stand behind the debt.


Well in a word.


It didn’t.


Not that it would surprise me to hear that the bond salesman had “let it be believed”, or even if the managers at RBS did that when they calculated their bonuses, even Moody’s when they flagged the extent of Dubai’s debt over a year ago, “let that be believed”.



And another thing:


The  idea has been floated in the international media a default by Nakheel would affect the credit rating and the ability to raise funds of other entities in Dubai, for example Emirates Airlines or DEWA (so pay up or else!).


That’s an interesting idea, except that those entities are very well run and they have very clear and transparent cash flows and corporate governance. And another thing, if you lent money to Emirates Airlines and they didn’t pay it back you could get easily a court order in UK to seize an airplane the moment it landed in UK, and to keep on seizing them until you were made whole.


That’s the idea behind most lending, you hand over the money, in return you get to hang on to or have a charge on some collateral. And if you are smart you make sure that the collateral will be worth more than the amount of money you handed over (plus interest), in the unfortunate event that you don’t get the money back.


How you do that is you do a valuation, and if it turns out that the valuation was wrong, well you should have done a better valuation.


Perhaps some of the banks that lent money to Nakheel might do well to start remembering those simple principles. Just an idea; and now that the UK taxpayers own RBS perhaps they might like to consider suggesting that to their highly paid managers.


Of course “the banks” could get in a huff and refuse to lend anything to Dubai or any Dubai related entity. That’s an idea also, but in that case it’s highly likely that Abu Dhabi would step in and help out.


Will Gordon Brown Come to The rescue?


Thankfully, it looks like in any case the long-suffering British taxpayer is on hand to put up the necessary cash so that the main creditor (NYSE:RBS) can be “saved”, or at least the $2 billion or so exposure can be “managed”.


That’s nice. I’m sure that the UK taxpayers will be delighted to hear that.


Oh well, perhaps the collateral that they can collect from that magnificent selfless act will be the keys to The World project (the one in Dubai – which is allegedly slowly sinking as the sand it it made out of compacts)?  


In which case Gordon Brown might be able to claim without any fear of contradiction; that he did indeed “Save the World”!



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