DUBAI SEEKS CASH AS COMMERCIAL DEBT LOOMS

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000491

SENSITIVE
SIPDIS

DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN

E.O. 12958: DECL: 11/15/2019
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI SEEKS CASH AS COMMERCIAL DEBT LOOMS

REF: A. A: DUBAI 392

B. B: DUBAI 299

C. C: DUBAI 457

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CLASSIFIED BY: Justin Siberell, Consul General.
REASON: 1.4 (b),(d)

1. (C) SUMMARY: The surprise announcement by Dubai
mega-developer Nakheel that it had paid USD 1.2 billion toward
its securitized debt obligations one month ahead of schedule
energized debt markets and coincided with the Government of
Dubai's own announcement of a new USD 6.5 billion bond sale road
show. Although Nakheel and Dubai officials insist that the
timing was merely coincidental, the two events, along with the
government's recent payment of a matured USD 1 billion Dubai
Civil Aviation Authority bond are clearly related and part of a
Dubai strategy to attract new credit to finance old debt. With
oil prices strong and investors drawn to the promise of higher
long-term yields in the GCC, the strategy appears to be working
as Dubai recently sold USD 1.9 billion in Sukuk bonds from the
latest offering. Dubai may succeed in extending out payment
schedules on its massive debt burden, but the prospects for it
beginning to erase, as opposed to merely service, its debt
remain uncertain. END SUMMARY.



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NAKHEEL DEBT PAYMENT ENERGIZES INVESTORS

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2. (C) Nakheel, the mega-developer behind some of Dubai's most
outrageous real estate development schemes (Palm Island, "The
World") announced a USD 1.2 billion securitized debt payment on
October 19, which temporarily energized investors as prices on
Nakheel's upcoming USD 3.5 billion Sukuk bonds climbed to 106
cents from 103. Nakheel's debt payment appears to have been
timed to coincide with the Government of Dubai's announcement of
a new bond sale road show that aims to raise USD 6.5 billion.
Shortly after the new bond sale announcement, the government
completed the sale of USD 1.9 billion in five year Islamic Sukuk
bonds, the biggest Sukuk sale from the Gulf region this year.
According to media reports, Suresh Kumar, who participated in
the bond sale meetings and who is Chief Executive of Investments
at Dubai-based bank Emirates NBD, noted that "not all of the
bonds are expected to be sold immediately, but rather over time
as they are needed."




3. (C) Dubai's new bond program attracted fairly strong demand
from investors in a bond market eager to capture attractive
spreads on the sovereign issuance. Although the government has
not completed the entire bond sale, Essa Kazim, Executive
Chairman of Dubai Financial Market, told Consul General and
Econoff November 8 that the initial USD 1.9 billion bond sale
tranche was oversubscribed, which would suggest that the
government could easily raise funds from the yet unsold portion
of the bond offering. Kazim speculated that investor interest
was driven mainly by long-term bullish attitudes towards the GCC
due to persistently high oil prices even as the global economy
has remained in recession. Investors, he said, anticipate a
windfall for GCC states as increased demand for oil accompanies
an eventual return to global economic growth.



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BOND SALE GOOD FOR NAKHEEL AND DUBAI PUBLIC DEBT?

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4. (C) It would seem the Government of Dubai plans to spend the
cash generated from its bond sale program toward meeting its
current public and private debts, which should be a good sign
for Nahkheel. At this stage, the total amount that the
government may provide Nakheel is subject to speculation,
especially since the developer continues to insist that it plans
to resolve its debt burden on it own. Nevertheless, Dubai may
quietly replenish Nakheel's coffers in order for the company to
make a public payment on its "own" (Ref A). Dubai local media
reported in May 2009 that the government provided Nakheel with
at least one cash injection of an undisclosed amount from the
USD 10 billion Dubai support fund last spring, which is also
managed by the Dubai Department of Finance (Ref B). Nakheel
chairman Sultan bin Sulayim told Consul General November 5 that
despite the company's difficulties, banks remained committed to

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Nakheel, and therefore willing to renegotiate debt terms due to
Nakheel's attractive asset portfolio. Of greater concern,
according to Sulayim, was Nakheel's cash shortage which
prohibited timely payments to contractors (Ref C).




5. (C) Additionally, the fact that the government repaid a USD 1
billion aviation bond on behalf of the Dubai Civil Aviation
Authority on November 4 suggests that the proceeds from the
recent USD 1.9 billion Sukuk bond sale are already being
deployed to resolve current debt. Kazim noted that the Dubai
Department of Finance had obligated the USD 1.9 billion Sukuk
bond sale proceeds to wind down public utility debts,
specifically mentioning the Civil Aviation Authority bond as the
government's top priority for the new cash. He also noted that
the additional proceeds expected from the remainder of the USD
6.5 billion bond had not yet been obligated but that some of it
was slated for Dubai's Road and Transport Authority (RTA),known
to be grossly overdue in payments owed to contractors on the
Dubai Metro and multiple road expansion projects (Ref A).



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BONDS SOLD, BUT AT WHAT COST?

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6. (C) As the government uses new debt to service old debt,
investors have rightly demanded increased premiums in order to
mitigate the still looming, although less likely potential of a
government default. Standard & Poor estimates that Dubai and
its government related entities will have to pay or refinance
roughly USD 50 billion in debt over the next three years - "an
amount close to 70 percent of the Emirate's gross domestic
product." Also according to media reports, economists estimate
that Dubai will need to pay or refinance USD 10 billion by 2010,
USD 12.1 billion in 2011, USD 15.2 billion in 2012 and USD 4.8
billion in 2013. Most market watchers believe that Dubai's
total outstanding debt stands at more than USD 80 billion. A
private real estate developer close to the Dubai leadership told
Consul General November 10 that the Government's strategy is to
extend out the due dates on about half its reported $80 billion
debt. The leadership felt confident, he said, that it could
"live comfortably" carrying a long-term deficit of around $40
billion.




7. (C) More risk tolerant investors have initially clamored to
purchase the high-yield Dubai sovereign bonds as spreads have
been priced just a level higher than junk bond status and mirror
those offered by high risk Dubai private entities and other
emerging market companies. Meanwhile the rest of the market
continues to rationalize the uncharacteristically high spreads
for the sovereign bond issuance and rightly speculates about the
negative implications that the high interest rates could have
for Dubai Inc. private entities who attempt to offer bonds at
reasonable rates in the future. Local media, echoing DFM's
Kazim, have noted interest in Dubai's bond sale is likely driven
by the search among investors for greater returns than can
currently be found in low-yield bond markets like the U.S.



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COMMENT

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8. (C) Nakheel's recent debt payment was intended as a sign that
the ailing real estate developer still has life left in it,
despite rampant speculation that the company was all but
finished. That early payment, in turn, laid the groundwork for
Dubai's announcement of a new bond offering, which resulted in
strong investor demand for new Dubai debt and subsequent
proceeds from the sale of USD 1.9 billion in Sukuk bonds.
Dubai's strategy appears to be to look to international capital
markets to finance fiscal shortfalls and debt obligations rather
than relying entirely upon Abu Dhabi to fill in the gaps. Dubai
is banking on investors discounting the obvious risks that come
with purchasing Dubai bonds in favor of the higher potential
yields for those bonds compared to the anemic returns to be

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found in the U.S. and other mature markets. In the end,
however, Dubai seeks to borrow now in order to pay back what it
borrowed in the past, a formula that may catch up with it unless
a dramatic (and currently unforeseen) turnaround occurs in the
Dubai economy. END COMMENT
SIBERELL