Friday, November 27, 2009

UBS says "Off" balance sheet loans may boost Dubai's debt over $80 billion.

By Anthony DiPaola and Chris Bourke

Nov. 27 (Bloomberg) -- Dubai, the Persian Gulf emirate whose state-run companies are seeking to defer debt payments, may owe more than the $80 billion to $90 billion in liabilities assumed by investors, UBS AG analysts said.

“Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the $80 billion to $90 billion markets have estimated so far,” Dubai- based real estate analyst Saud Masud wrote in a note. “This could imply that the debt issued by Dubai in recent weeks is insufficient to meet upcoming redemptions.”

Dubai, which has said it will raise as much as $20 billion selling bonds to repay borrowings, said on Nov. 25 that state- run Dubai World, with $59 billion of liabilities, would ask creditors for a “standstill” agreement as it negotiates to extend debt maturities.

The request to delay debt repayment “came as a major shock” to investors, Masud and fellow UBS London-based analyst Reinhard Cluse told clients on a conference call today. Dubai World property unit Nakheel PJSC has $3.52 billion of Islamic bonds due Dec. 14. Dubai World may seek to negotiate all its liabilities as it reorganizes the business, Masud said.

“The Nakheel sukuk is the largest that has ever been issued,” Cluse said on the conference call. “Markets will take some time to digest this blow.”

‘Significant Sweetener’

Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before credit markets seized up last year. The second biggest of seven sheikhdoms that make up the United Arab Emirates formed a fund to help reorganize state firms and sold $10 billion in bonds to the national central bank in February.

It borrowed an additional $5 billion from Abu Dhabi government-controlled banks Nov. 25, half the $10 billion in bonds that Dubai ruler Sheikh Mohammed Bin Rashid Al-Maktoum said he planned to raise by yearend.

Nakheel bondholders could demand a “significant sweetener” to renegotiate the debt and look to determine which of the real estate unit’s assets they may be able to claim, according to Masud.

There is growing interest from Persian Gulf investment funds in acquiring properties owned by Dubai entities, including Nakheel, which may be forced to sell assets to reduce debt, said Michael Atwell, head of Middle East operations at real estate broker Cushman & Wakefield.

‘Still Buzzing’

“We can sense it, and we’re hoping to have some transactions from several funds with buying requirements, some over $100 million,” he said. Potential buyers may be seeking stable cash flow from buildings with long leases.

“The city is still buzzing. Dubai won’t turn into a ghost town, but there’ll be some big restructuring and reorganization, without a doubt.”

Seeking a repayment delay may indicate that Abu Dhabi, the U.A.E.’s largest sheikhdom, may not want to support Dubai further financially until the smaller emirate addresses internal problems at government-run companies, Masud said.

“This could be the realization that you cannot simply buy your way out of this crisis,” Masud said.

The request could also suggest that Abu Dhabi and Dubai have decided to seek to bolster long-term confidence in the market by forcing weaker parts of government businesses to take responsibility for bad decisions and could involve defaults at some Dubai firms, Masud said.

Mortgage Defaults

Dubai property developers may be liable for an estimated $11 billion required to build 40,000 homes that they have started, said Masud in an interview yesterday. That amount represents the off-balance sheet cost, or “funding gap” required to complete and hand over the properties, on which investors are now defaulting, by the end of 2010.

Nakheel’s share of that funding gap is about $2 billion, estimated Masud. Around half of the investors in the 40,000 unfinished homes may default by the end of next year, he said.

Mortgage defaults, which stand at about 3 percent of the total in the U.A.E., may increase fivefold to “the teens,” Masud said on the call today.