DUBAI Dubai's shock move to restructure its biggest corporate debtor, Dubai World, and delay repayment on some of the company's $59 billion of liabilities could signal a broad restructuring of the emirate's corporate landscape.
A web of government-linked companies, including Dubai World and affiliate Nakheel, has presided over spectacular growth in the emirate's real estate, shipping, transport and financial sectors over the past two decades.
Now part of that constellation of companies could be broken up as Dubai struggles under its massive debt load. In some cases, firms could be dismembered or partially privatized.
John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group, called Dubai's announcement on Wednesday "a huge confidence destroyer...Unless there are clear signals, Nakheel and DW could be in far deeper trouble than before."
"They're announcing that they have two institutions that cannot repay their obligations on time," he said. "It's going to make people more jittery. They will ask more questions about Dubai debt and its repayment processes."
The government said on Wednesday that Dubai World would ask all providers of financing to itself and Nakheel to extend maturities of the debt until at least May 30 next year. That appears to affect about $5.7 billion of debt due to mature before the end of May.
Dubai World is one of the emirate's three big holding firms, along with Dubai Holding and Investment Corporation of Dubai. In addition to Nakheel, its affiliates include DP World, a huge port operator, and Istithmar, an investment company with a portfolio of over 50 firms in the financial services, consumer, industrial and property sectors.
The restructuring announcement was a shock partly because Dubai World had said last month that a previous restructuring plan, prepared with AlixPartners, the turnaround experts advising on the General Motors bankruptcy, was nearly complete and would save $800 million over three years.
It was also surprising since Dubai World had previously seemed to be at the core of the government's plans for the emirate.
The government said on Wednesday that it had raised $5 billion by issuing bonds to two Abu Dhabi-controlled banks; the money will be managed by a Financial Support Fund that will lend to support Dubai's development.
But the government specified that the bond issue was not linked to Dubai World's restructuring and would merely go toward the "general purposes" of the fund, implying it would not be used to bail out Dubai World.
"The Financial Support Fund has obviously not deemed Dubai World to be of immediate strategic importance," said Ian Munro, head of research at MAC Capital Advisors.
The government's five-paragraph announcement on Wednesday gave no details of the planned restructuring, beyond saying it would occur with the help of a managing partner for corporate finance at consultants Deloitte.
But it noted that Dubai World had a portfolio of important businesses and said the restructuring "will be designed to address financial obligations and improve business efficiency for the future."
This could presumably open the door to a major reorganization of Dubai World's assets, possibly including disposals, if business efficiency pointed in that direction.
In recent months, Dubai has been abuzz with speculation that assets in various corporate groups could be merged or sold in order to raise funds and cut debt.
In May, Sheikh Ahmed bin Saeed al-Maktoum, chairman of Dubai's Emirates EMAIR.UL, denied rumors that the airline might merge with Etihad, a carrier owned by neighboring Abu Dhabi.
The restructuring of Dubai World may signal that in exchange for its financial support, Abu Dhabi is putting pressure on Dubai to reform its freewheeling corporate sector, because it wants to protect its investments. The central bank of the United Arab Emirates bought $10 billion of Dubai bonds in February.
Abu Dhabi pumps most of the oil of the UAE, the world's third-largest crude exporter, has sovereign wealth funds estimated to hold hundreds of billions of dollars in assets, and is the wealthiest of the seven emirates of the federation.
Dubai's stock market closed for the day before the government made its announcement, but may fall when trading resumes after the long Eid al-Adha holiday.
"Definitely this will affect the stock market; it is really negative," said Rami Sidani, Schroders Middle East head of investment.
"A lot of domestic and regional banks own Nakheel bonds, and the bonds will definitely plummet."
(Additional reporting by Matt Smith, Enjy Kiwan, Racha Uppal, Rania Oteify, Amena Bakr and Nicolas Parasie; Editing by Firouz Sedarat and Andrew Torchia)