Dubai World Debt Exposes Wider Corporate Debt Challenges

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The problems besetting Dubai have sent a mini shock wave around the worlds’ financial centers last weekend as the Middle East had been seen as one area of growth and solidity in an otherwise risky world. Once the dust had settled though it began to dawn on some folks that there is more than just an isolated problem here. Dubai’s property market had been shaky for the last year, values had dropped and occupancy levels had risen dramatically. Clearly developers were going to be in trouble. So when Dubai World the flagship investment vehicle of the Kingdom announced it was seeking debt re-scheduling it shouldn’t have come as a complete bombshell. The aftershock has been the size and duration of the re-scheduling, originally some $3.5bn due on December 14 postponed for 6 months was mentioned, now it appears discussion is ongoing regarding at least $26bn (and possibly all the company’s $60bn of debt) for 5-6 years. Added to this, the assumed support of Abu Dhabi has failed to materialize and thrown into question quasi sovereign underwritten debt elsewhere around the world. If Dubai World is not too big to be allowed to fail who else is at risk?

That is the $200bn question, $200bn being the sum of corporate debt that is due in 2010 half of it owed by companies in Russia and the United Arab Emirates.

According to an article in the NY Times companies in several countries face immediate tests. Companies in China will have to borrow $8.8 bn next year; companies in Mexico $11 bn. According to an analysis by JPMorgan Chase, Russian companies borrowed $220 billion from banks or by selling bonds from 2006 to 2008. That is the equivalent of 13% of Russia’s GDP. In the Emirates, that figure was $135.6 bn, or 53% of GDP; in Turkey, it was $72 bn, or 10% of G.D.P.; and in Kazakhstan, it was $44 bn, or 44% of G.D.P.

In the past, if companies could not meet those obligations, governments might have stepped in. But already some companies have defaulted on payments after assumed government guarantees failed to materialize. In Russia, for instance, the foreign debt totals more than $470 bn. But only a tiny fraction of that ” about $29 bn ” is sovereign debt. The rest is owed by Russian companies, including state giants like Gazprom and the aluminum producer Rusal. Rusal, who’s IPO in Hong Kong has been repeatedly postponed and looks very unlikely to now succeed, has been desperately trying to re-negotiate some $16bn of debts with 70 banks. The Dubai World restructuring has already raised re-financing costs for Russian firms owing some $20bn as lenders have sought higher margins to counter the perceived increase in risk.

The fear is banks are sitting on a time bomb of potential losses that they have barely even begun to quantify. Many of Dubai World’s bankers are British, still recovering from the mortgage and CDO write downs never mind there’s always the UK tax payer to bail them out.

–Stuart Burns

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