Dubai World’s Debt Not Guaranteed by Government (Update2)

Nov. 30 (Bloomberg) — Dubai’s government said it hasn’tguaranteed the debt of Dubai World, the state-controlled holdingcompany struggling with $59 billion in liabilities, and thatcreditors must help it restructure.

“It is correct that the government owns Dubai World, butthe decision when it was set up was that it should receivefinancing based on the viability of its projects, not ongovernment guarantees,” Abdulrahman Al Saleh, director generalof the emirate’s Department of Finance, said in an interviewwith Dubai TV, when asked whether the government was backing thedebt. “The lenders should bear part of the responsibility.”

Dubai’s government said Nov. 25 that Dubai World would seeka standstill agreement with creditors and an extension of loanmaturities until at least may 30, 2010. The announcement led tothe biggest declines in Asian shares in three months last weekand Europe’s worst rout since April. Investors were concernedthe proposal risks triggering the biggest sovereign defaultsince Argentina in 2001.

Dubai shares tumbled and Abu Dhabi’s stock index today fellthe most in at least eight years on the first trading day sincethe announcement. The Dubai Financial Market General Indexdropped 7.3 percent to 1,940.36, the biggest decline sinceOctober 2008. Abu Dhabi’s ADX Index fell 8.3 percent, the mostsince Bloomberg began compiling the data in 2001.

Nakheel Bond Suspension

Nakheel PJSC, Dubai World’s property unit whose $3.52billion Islamic bond is due Dec. 14, asked the Nasdaq Dubaistock market today to suspend its securities “until it is in aposition to fully inform the market.”

“The times of implicit support are clearly over,” saidPhilipp Lotter, vice-president of Moody’s Investors Service inDubai. “In the past entities such as Dubai World certainlyrepresented themselves as quasi-government entities, whereasthere was no legal obligation on behalf of the government tosupport, and that has certainly shifted with last week’sannouncement.”

In the prospectus for its first Islamic bond sale inOctober, the government said “certain strategic government-related entities of the emirate have significant borrowingswhich are not direct obligations of the government of Dubai.”The government raised $1.93 billion from local and internationalinvestors in the sale.

Government Prospectus

“If any of these entities are unable to, or arepotentially unable to, fulfill their debt obligations, the Dubaigovernment, although not legally obliged to do so and withoutany obligation whatsoever, may at its sole discretion decide toextend such support as it may deem suitable,” according to theprospectus.

“It’s not correct to assume that Dubai World is part ofthe government of Dubai,” al-Saleh said.

Dubai led a decline in the cost of protecting bonds in theGulf region from default today after the U.A.E. Central Bankeased credit for lenders and said it “stands behind” local andforeign banks as they face the prospect of rising losses fromDubai World’s possible default.

Credit-default swaps on Dubai fell 59 basis points to 588,according to CMA DataVision prices at 1:30 p.m. in London. Thecontracts more than doubled last week.

National Bank of Abu Dhabi PJSC, the United Arab Emirates’second-largest bank by assets, and Abu Dhabi Commercial BankPJSC fell the most in more than five years on exposure to DubaiWorld Group. NBAD said today it’s owed $345 million by thecompany. ADCB may be owed $1.9 billion, two people familiar withthe matter said Nov. 27.

Central Bank Measures

The U.A.E. support facility is one of several steps takenby the central bank to cushion the country from the impact ofthe global credit crisis. The bank made 50 billion dirhams($13.6 billion) available to banks in September last year andguaranteed deposits of all local lenders and some foreign banksthe following month to boost confidence.

Dubai, the second-biggest of seven states that make up theU.A.E., and its state-owned companies borrowed $80 billion tofund an economic boom and diversify its economy. The globalcredit crisis and a decline in property prices hurt companieslike Dubai World as they struggled to raise loans.

To contact the reporter on this story:Vivian Salama in Dubai vsalama@bloomberg.net

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Dubai World's Debt Not Guaranteed by Government