Dubai Debt Restructuring: Is It Enough?

Dubai International Capital (DIC), the private equity unit of Dubai Holding, yesterday announced that they are looking to extend the maturities on some of their upcoming debt payments which came as a no surprise and it is unlikely to be the last time an UAE company will have to approach its lenders to ask for some latitude. Although Dubai World (DW) had come to a final agreement with its key creditors over the terms of its debt restructuring process, the company will still face considerable difficulty in meeting its future obligations.

DIC is seeking a 'three-month extension to 30 September 2010 of certain maturities' according to a company statement. The extension presumably applies to DIC's US$1.25bn loan maturing in June, although the company does have around US$2.6bn in debt overall which could also be affected. Although details are vague as yet, we would not be surprised if the company used the prospective three-month delay in order to negotiate a longer-term debt restructuring deal, similar to the one just hammered out by DW and its creditors.

Looking at the wider picture, Dubai's fundamental macroeconomic problems largely stem from the collapse in the domestic real estate market. Given that we expect demand for property in the emirate to remain subdued well into the medium term due to over supply of the properties, we consequently believe that over the coming years, many companies operating in the real estate sector are likely to struggle to generate sufficient operating cash flow (via sales) to pay back their borrowings on time. This analysis not only applies to real estate firms per se, but also to firms that are dependent on the Dubai real estate sector for their business. As such, investors are likely to remain extremely wary of any UAE company heavily exposed to the sector. Moreover, further requests for debt restructuring from other Emirati firms with either direct or indirect property market exposure are highly likely.