Smoke and Mirrors

Since the start of this debacle it has been surrounded by more than its fair share of “smoke and mirrors” and is there really any reason to believe the situation is now a fully transparent one?

Early on in the crisis a statement was made by Abdulrahman al-Saleh, director general of Dubai’s Department of Finance, that spooked many parties not least the bankers lending to Dubai World and its associated companies. “Creditors need to take part of the responsibility for their decision to lend to companies,” he said.

“They think Dubai World is part of the government which is not correct. The government is the owner of the company but since its foundation it was established that the company is not guaranteed by the government.”

When parties undertook to lend to Dubai World companies such as DP World, a guarantee of payment of the loan offered by Dubai World was undoubtedly seen as good as a sovereign guarantee. Indeed, interest rates negotiated on loans were calculated as though a sovereign guarantee was in place. The statement, therefore, that Dubai World was not part of the government naturally came as a shock and one which sent shivers running down many financial “spines”.

It was fairly natural that financiers to DP World began wondering what the fate of their respective loans to this company might be and indeed what would happen to DP World as an organisation?

Adding a calming influence at a general level came the news that the Central Bank of the UAE in oil rich Abu Dhabi had agreed to stand behind the banks and finance houses in the region hit by Dubai’s financial troubles. The Central Bank said it would provide emergency liquidity facilities to banks in the region in a mirror of the intervention by global central banks during the preceding banking crisis in the West. Plus the news broke that Abu Dhabi had provided $10bn to Dubai around mid-December enabling, among other things, Nakheel, a property unit of Dubai World to pay off bonds when they matured.

The general impression was that this was a hand out from Abu Dhabi with little in the way of visible strings attached. But then came the news that the total lent in December included $5bn already raised from Abu Dhabi in November. And following on from this it was not a handout but a loan based on commercial terms.

Suddenly then the myth largely disappeared that Abu Dhabi would always be waiting in the wings to bail out its adventurous neighbour Dubai.

So what does this mean for DP World? DP World executives rightly point out that the company has received no financing from Dubai World since 2007 when it became an independently-listed company. And that none of its credit facilities need refinancing before 2012. It also feels its assets are protected by contract law from Dubai World debt.

The reality is, however, that this is a company that is now viewed vastly differently in the marketplace from how it was a year ago. Cynics might even say its recent re-igniting of the London Gateway project – a project located not so far from the City of London – is a measure designed to boost confidence in the financial world rather than a real commitment to bringing the Gateway project on-stream.

Finally, why should the break-up of DP World, at least in part, not become a reality if Abu Dhabi looks to receive something worthwhile in exchange for further significant financial assistance? Surely, you would only want what is worth having?