Dubai eyes refinancing of $10bn in state debt

Dubai has for the first time raised the prospect of restructuring some bonds next year as the emirate and its state-related companies face a wall of $10bn in debt repayments.

The emirate is also pursuing other options, including raising $2bn in funds from liquid local banks, as it helps government-related entities meet their obligations, including three bonds totalling $3.8bn that mature during the course of next year.

“We are working hard to meet all our liabilities but times are different,” a senior government official said. “We are more confident we can negotiate a commercial deal with bondholders.”

Dubai was plunged into crisis almost two years ago when it shocked markets by warning it might not meet its debt obligations. It avoided a default with the help of about $20bn in loans from the United Arab Emirates and its capital, Abu Dhabi.

The government has since pursued a strategy of repaying bondholders in full while negotiating loan extensions with banks.

Dubai still faces “execution risk” in meeting debt repayments next year, despite an economic revival in trade and tourism, Moody’s, the rating agency, will say in a report to be published on Tuesday.

The report will also warn against any bond refinancing that amounts to a default, saying this would damage fragile investor confidence in Dubai. “A default would damage the ability of Dubai to fund its core activities,” David Staples, Moody’s regional corporate finance managing director, said.

The Dubai official said the government was co-ordinating plans with all state-related entities to manage what would be a “challenging” 2012. The official said Dubai’s cash-rich state-owned funds might buy distressed assets from state-related entities that need to make repayments at above-market rates in order to prevent fire sales and generate cash.

The government could also invoke a law, Decree 57, passed to help this year’s $25bn restructuring of debts at the troubled conglomerate Dubai World. The law should allow Dubai World units to restructure bonds if they receive support from two-thirds of investors.

Dubai Holding Commercial Operations Group, a conglomerate owned by the ruler, has a $500m bond due in February; Dubai International Financial Centre Investments has a $1.25bn Islamic bond due in June; and the Jebel Ali Free Zone, a unit of Dubai World, has a $2bn Islamic bond due in November. Moody’s estimates that the emirate’s total debt due next year is $10bn.

Moody’s has maintained high default-risk ratings on the three companies, given Dubai’s limited financial resources and the short time frame for selling assets, many of which were bought at the peak of the boom.

Moody’s estimates the emirate’s overall debt exposure at $101.5bn, of which state-related companies account for $68.6bn.