Dubai faces first big test with Borse funding

DUBAI Wed Feb 18, 2009 8:24am EST

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DUBAI (Reuters) - Dubai faces its first critical test of the economic crisis as one of its most high profile companies, Borse Dubai, struggles to secure enough market funding to avoid defaulting on about $3.4 billion in debt.

Experts say the exercise will clarify whether Dubai, the financial and tourism center for the Gulf, can muscle its way out of the crisis alone, or whether the federal government dominated by Dubai's wealthy neighbor Abu Dhabi will provide a safety net.

"It's a very critical test. It's the first Dubai state-owned, high profile entity that is going to be facing a (debt) rollover. It's a pretty sizeable amount," said strategist Fahd Iqbal at investment bank EFG Hermes in Dubai.

"It's been confusing and surprising that the delay has gone on so long. It is severely undermining investor confidence in the Emirates," he said.

Last week the cost of insuring against a default for Dubai debt hit record highs at 1,025 basis points for credit default swaps, more expensive than the crisis poster child Iceland, underscoring the level of concern in the markets.

Borse Dubai is the holding company for stock exchanges Dubai Financial Market and Nasdaq Dubai, and has played a leading role in expanding the emirate's financial sector.

Now the Borse is struggling with its own finances as it tries to raise around $2.5 billion to allow it to roll over $3.4 billion in obligations, an effort that appears to mark the post-bubble era and the end of cheap money in the Middle East.

Dubai, one of seven emirates in the United Arab Emirates that rode to fame on a real estate boom, has few natural resources of its own, unlike neighboring Abu Dhabi, one of the world's largest oil exporters.

Conservative Abu Dhabi owns the world's largest sovereign wealth fund, ADIA, while tourist haven Dubai is about $80 billion in debt, according to its own estimates.

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The assumption that Abu Dhabi or the federal government would bail out Dubai if needed has gone unquestioned until recent weeks. But failure to raise the money would call into question the creditworthiness of many indebted Dubai companies.

"There has been some concern around the question of whether Dubai can repay its debts," said economist Mary Nicola at Standard Chartered bank in Dubai.

"It would help the markets that they are responding as one and that Dubai can in fact repay its debts."

Moody's estimates that Dubai's mostly state-linked companies will need to raise around $15 billion in 2009.

The longer the search for funding continues, the higher the risk for Dubai. Ratings agency Moody's cautioned recently that any hint the federation would not provide a safety net of sorts would undermine support for Dubai issuers.

"It can offer a good indication of what other entities can expect," Iqbal said.

The UAE government's move last year to guarantee all bank deposits and interbank lending and to merge ailing real estate lenders Amlak and Tamweel in Dubai created the impression that the federal government would provide support to all systemically critical players in the Emirates.

Hopes, however, began to fade when the government appeared to put the merger on hold and while the emirate of Abu Dhabi has recapitalized five of its banks in a $4.36 billion deal there is, as yet, no similar deal in the offing for Dubai.

The syndication struggle may already be having a chilling effect on capital-raising ambitions by Dubai corporates.

Dubai's Electricity and Water Authority (Dewa) has delayed an $8.6-billion power plant and is in talks with European banks to arrange financing for projects, its managing director said in remarks published on Tuesday.

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