Clock Ticks for Dubai Debt and Nakheel

Dubai is facing off against its bankers. As the government tries to restructure a vital $3.5 billion bond, due in December, for troubled real-estate company Nakheel, bankers seem to have two options.

They can agree to new terms and lend more. Or they can burn bridges with the government and accept that they will struggle to win future business in Dubai and oil-rich neighbor Abu Dhabi. The problem is, giving Dubai more debt is risky for the likes of Barclays, Deutsche Bank and Credit Suisse.

First, it is unclear quite how much Dubai owes altogether. Nakheel recently said in a filing that its government-controlled parent, Dubai World, alone has consolidated liabilities of about $60 billion.

The fear is that Dubai's total debt burden, including government-related entities, might be bigger than the $80 billion figure the government mentioned last year. Given a lack of clarity over definitions, some bankers estimate that the overall figure could be anywhere between that and $160 billion, close to the GDP of the United Arab Emirates, of which Dubai is part.

Lending more to a real-estate company amid a slump also carries risks. Nakheel says it has $80 billion of real-estate projects in development. But with Dubai house prices down 50% in a year and international companies sending fewer workers, Nakheel's revenue is hard to predict.

Even so, investors seem convinced that banks will support Nakheel or that it will get some of the $10 billion Dubai borrowed from the Abu Dhabi-based central bank this year. The Nakheel bond has bounced from 63.5 cents on the dollar to 90 cents. But even if an embarrassing default is avoided, the damage has already been done to the sheikdom's financial reputation.


Source: The Wall Street Journal