Can Dubai address investor concerns? (page 1 of 2)

It was announced last month that a US-based hedge fund is suing Dubai-based maritime services company Drydocks World for repayment of around $45.5m. The legal action was launched after the ship repair unit of troubled conglomerate Dubai World defaulted on loans in August, and is just the latest in a series of incidents which risk reigniting debt fears in the emirate.

Drydocks World and its creditors have been in talks for more than a year in an effort to restructure debts of around $2.2bn. And this is just the tip of the iceberg with regards Dubai debt: the emirate has a total debt pile of some $110bn, with around $14bn due to mature in 2012.

The trouble stems from November 2009 when Dubai World, the main investment vehicle for the Dubai government, announced that it would seek to restructure payments on around $25bn of debt. But while creditors may have agreed on a restructuring plan for the debt owed by Dubai World, there remain a number of other government-related entities whose deals are yet to be finalised, including more than $6bn in debt held by Dubai Group, a unit of Dubai Holding.

"With respect to Dubai, not much has changed since a few years ago, when it asked to restructure debt owed by parastatal organisations to international investors," says Dr Florence Eid, CEO of London-based research and advisory firm Arabia Monitor.

"What has perhaps changed for Dubai is that they have gained some investor confidence since the terrible, terrible impression they projected back in November 2009," she continues. "They have managed to clean up their image a little bit by restructuring some of the debt and by honouring other parts of the debt through the financial support fund that was set up."

Financial support bankrolled by Abu Dhabi

That financial support fund was bankrolled in large part by the neighbouring emirate of Abu Dhabi, the oil-rich UAE capital. And yet the hard work is just beginning: according to Arabia Monitor, Dubai's gross government-related entity (GRE) debt due over the next five years is the highest in the world at 81.7% of GDP, eclipsing that of Russia (73%), the US and South Korea (each at 40%), and Germany (20%).

JPMorgan has described $3.3bn of the $14bn of debt maturing next year as "challenging", including bonds owed by Dubai International Financial Centre Investments and Jebel Ali Free Zone Authority. And at the heart of Dubai's troubles remains Nakheel, part of Dubai World and the real estate major which had remodelled Dubai's coastline through ambitious projects including the Palm Jumeirah and World: huge man-made archipelagos which captured the attention of the world in the first decade of the 20th Century.

Dubai real estate developers left hugely exposed

In 2008 when the global economic downturn prompted a flight of foreign capital from Dubai, iced water was poured on the emirate's previously red-hot real estate market. Developers were left hugely overexposed, and none more so than Nakheel, which had gambled on continued market growth to the tune of several billion dollars. "In Dubai the supply that came on the market was not to service the population," says Majed Azzam, a real estate analyst at AF-HC Securities. "It was a very fluid population and it suffered a mass exodus which put a lot of pressure on prices."

It has since emerged that Nakheel wrote down almost $21.4bn from the value of its real estate as property prices in the emirate collapsed.