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The Dubai government on Wednesday announced a restructuring of Dubai World after the company shocked creditors by requesting a standstill on all financings to it and its subsidiary Nakheel, the "palm island" developer. Granting of the request would result in a technical default.
Dubai World, one of the emirate's main state holding companies, asked for a delay on maturities until at least May 30, 2010. The company has total debts of $59 billion, including $3.52 billion of Islamic bonds due December 14 from its property unit Nakheel.
The government's decision risks undermining investor confidence in Dubai, a Middle East financial hub. A decision is yet to be taken on how to deal with investors insisting on repayment in December.
The process of restructuring has begun with the appointment of Aidan Birkett, Deloitte's managing partner for corporate finance, as chief restructuring officer to Dubai World. The company's major asset is DP World, the ports operator which bought Britain's P&O.
The news prompted major credit rating agencies to downgrade ratings on a number of state-owned companies. Thursday, Moody's Investors Service has downgraded the ratings of all six government-related issuers in Dubai and left them on review for possible downgrade.
Ratings of DP World and Dubai Electricity & Water Authority are downgraded to Baa2 from A3, while those of DIFC Investments and Jebel Ali Free Zone are lowered to Ba1 from A3 and Baa1, respectively. Ratings of Dubai Holding Commercial Operations Group and Emaar Properties are brought to Ba2 from Baa1.
S&P lowered the ratings on five companies to BBB+ or BBB- except Dubai Electricity & Water, which it does not rate. The rating agency said, "a restructuring may be considered a default under our default criteria". The ratings may be lowered further, the agency noted.
The credit-crunch had hit Dubai dramatically. Nakheel had to fire thousands of workers to cope with the crisis. As local property prices declined and credit availability became difficult contractors were forced to halt work.
Earlier on Wednesday, Dubai's government announced it had raised a $5 billion bond for its Financial Support Fund from government-owned banks in neighboring Abu Dhabi. The government noted that this is not linked to the restructuring of Dubai World and is meant for the general purposes of the Dubai Financial Support Fund.
Last Friday, Dubai ruler Sheik Mohammed bin Rashid Al Maktoum revealed a shake up in the emirate's key corporate institutions. Sheikh Mohammed removed the governor of the Dubai International Financial Centre, Omar bin Sulaiman, who was a key player in transforming Dubai into the most important financial hub in the Middle East. A day earlier, three members of the board of the Investment Corporate of Dubai were removed.
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