Sunday, February 22, 2009

"Dubai's Debt Repreive"

After weeks of feeling like the international presses doormat, Dubai Inc finally caught a bit of a break as it would appear that big brother (he of 8.5% of the world’s oil reserves) has decided to step in and shoulder some of the debt burden. The news, coming on the heels of a week’s worth of speculation in the local equity markets, is that the UAE Central Bank will be subscribing to $10billion worth of a $20billion dollar bond issuance by the Government of Dubai. This puts Dubai Inc in the unique category of first globally bailed out Emirate.

So, what are the ramifications of this? Seeing as we’ve been living in a world of speculation for the past two months, it’s nice to finally get some tangible news to analyze.

From a Dubai Inc debt perspective the news is extremely positive. Dubai Inc has about $80billion in mostly short-term debt outstanding. $15 billion is roughly due to mature this year. Now, while 80+20 does equal 100, Dubai’s big problem is short-term liquidity. To quote Irving Fisher, “Debts due at once are more embarrassing than debts due years hence, and those payable at the option of the creditor, than those payable at the convenience of the debtor. Thus debt embarrassment is great for call loans and for early maturities.” Thus, if we were to analyze this news within the context of Dubai’s total debt embarrassment; we could conclude that Dubai has drastically improved its ability to meet its near term obligations (that 4% coupon looks very generous if you look at Dubai CDS spreads). Will some difficult decisions need to be made down the road? Of course, but now Dubai has secured some flexibility to ride out the storm.

The equity story is a little different, but should be all too familiar for those following the global economic crisis. Dubai’s debt obligations continue to leave little room for shareholders chasing corporate profits. It is unlikely that this money will be used by the government to purchase preferred stock or even dilutive stakes in corporate entities. I also think it is unlikely that this money can address the root problem of incredible overcapacity in a real estate driven economy. Dubai has built it, and the will come, but odds are “they” won’t get here fast enough to save private capital that was betrayed by hopelessly unproductive works. Banks, facing on oncoming tsunami of non-performing assets, will continue to be reluctant to lend to the real estate sector. Why? The answer is quite simple. Banks, like everyone else in the world continue to expect unemployment to rise and asset prices to fall. Moreover, when you expect to continue to pay for past mistakes, you try very hard to avoid making new ones. Sadly, shaking a deflationary bug is just not something that equity markets do very well.

I believe the Dubai Government will be very selective when it comes to allocating this money. I presume that they will focus on streamlining operations, infrastructure projects, and debt obligations tied to “key” strategic assets. Basically, they will continue to focus on restructuring and positioning themselves for the long haul.

That being said, a little good news can go a long way, coiled springs like to pop, and dead cats do bounce. Trade accordingly.

Monday, February 16, 2009


Dear Robert,

I am writing to inform you that the rumors regarding our demise are greatly exaggerated. Having come across your article(Laid-Off Foreigners Flee as Dubai Spirals Down) the New York Times I thoughts I’d take this opportunity to provide you with some color on the situation out here. First, the Palm is not sinking and the Burj is not collapsing. Also, last time I checked there were no cockroaches coming out of the faucets at the hotels on the island. Not exactly sure who or what entity are the sources of these rumors, but if I was a conspiracy theorist I might just blame the London-Moscow-Mumbai-Hong Kong-NYC Axis of Evil, commonly referred to as the Five Fathers of Fear.( If you don’t know them, you should. Rumors have it that they were intimately involved in spreading the rumors that brought down Lehman…as they were looking to cause a global crash to accumulate all assets on the cheap)

Though I will have to say that we got a kick out of the rumor regarding 3000 abandoned cars with nice little apology letters accompanying the maxed out credit cards. I’d like to believe that Dubai Debtors maintain a high level of etiquette when they skip town, but the fact of the matter is I have yet to see any evidence of such nonsense. Maybe these letters include forwarding addresses and IOU’s too.

As for poor Sofia, I hope she finds a job along with the millions of other people around the world who have been laid off in the past month. I also hope she can hang onto that home she bought just like I hope everyone in NYC who is at risk of losing a home can too. And as far as the debtor’s prison situation goes, it exists for a reason, to deter reckless borrowing. Clearly, it didn’t work very well.

The fact of the matter is that Dubai clearly is facing its fair share of economic challenges as it is not immune to this global economic collapse. The real estate market will suffer, and the booming growth will disappear for a while. The experiment will need to be tweaked, rethought in some instances, and tempered. But at the end of the day Dubai could never have become Dubai if it didn’t over do it. To put an empty desert on the map you need to create a spectacle, and when you create a spectacle you are bound to eventually hit a period were the excess catches up to you.

Five years ago nobody in New York would be writing an article about this city let alone contemplating moving here or buying a home here. So, to a certain extent Dubai has already accomplished its goal. Now, it just needs to ride out the storm.

When you build a dream on sand, you’d have to be a fool to let it slip through your hands…….

P.S. The decline in traffic is something that most of us are enjoying. The situation out here was getting a little ridiculous, but we are nowhere near ‘ghost town’ status yet.