Abu Dhabi has stepped in to bail out fellow United Arab Emirates member (profligate) Dubai with a $US10 billion ($10.9 billion) injection, of which 40% will be used by troubled state-owned conglomerate Dubai World to pay a loan falling due yesterday.
The move was after the Dubai stockmarket rose on Sunday, despite the impending deadline for a $US3.5 billion Islamic bond issue repayment by the state’s major property group, Nakheel.
That was either inspired guesswork or a bit of well-informed insider trading because late yesterday Abu Dhabi found $US10 billion to prevent any default by Dubai.
It takes the amount provided by Abu Dhabi to Dubai to a massive $US25 billion since last February.
Of the latest amount, $US4.1 billion has been allocated to troubled state-owned conglomerate Dubai World to pay immediate obligations, the most important being the Islamic bond of $3.5 billion owned by Nakheel.
The bailout was the least expected of all options Dubai had on the table after requesting a standstill on $US26 billion in Dubai World debt on November 25.
The standstill move worried markets and set off new fears about sovereign debt, especially for Dubai, Greece, Spain, Ireland and Italy.
"The government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World," the chairman of the Dubai Supreme Fiscal Committee said in a statement reported by Reuters and Bloomberg.
"As a first action for the new fund, the government of Dubai has authorised $US4.1 billion to be used to pay the sukuk obligations that are due today." (That’s the Nakheel Islamic bond.)
The Australian market picked up to finish higher on the day after falling to the lowest point in trading a few minutes before 4 pm, just before the Dubai news was made known.
Other markets rose across the region, and European and US trading also perked up.
Abu Dhabi is the largest member of the United Arab Emirates, and a big oil exporter and it’s where the UAE’s central bank is based.
They invested $US10 billion in a Dubai bond issue in February and then a further $US5 billion was advanced to Dubai on November 25, only hours before Dubai demanded a six month standstill on all debt repayments.
"We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheikh Ahmed bin Saaed al-Maktoum said in the statement.
"Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come."
Excess funds would be used to cater to Dubai World’s needs up until the end of April 2010, the statement said.
It said Dubai will use the rest of the money to pay “trade creditors and contractors as well as meet interest expenses and company working capital through April 30, 2010 – conditioned on the company being successful in negotiating a standstill as previously announced”.
Dubai has announced a bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future.
"Dubai will announce a comprehensive reorganisation law, a framework that is based upon internationally accepted standards for transparency and creditor protection," Sheikh Ahmed said.
"This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations."
