What impact will Dubai World’s debt default have on inward investment into the emirate and the wider region?

In the aftermath of Dubai World’s shock request for a standstill in US$26bn of distressed debt last November, international investors immediately hit out at the emirate’s handling of the situation. Apart from the lack of transparency and the horrible timing (announced the day before the Eid holiday, the news spooked markets), investors mainly complained that the government hadn’t made it clear whether it would pick up the tab for Dubai World and its subsidiary Nakheel’s bond repayments.

But lawyers say international shareholders in Dubai companies simply got lazy and failed to read the contracts they had signed, which clearly stated that there was no such government guarantee. Daniel Greenwald, managing partner at Chadbourne & Parke’s Dubai office, says: “I recently advised some Nakheel sukuk holders – international financial investment companies – who were indignant that the Dubai government “reneged” on its guarantee of the sukuk. When I noted that the sukuk documents were explicit, in several places, that the government was not guaranteeing the sukuk, the response was, ‘Well, they implied in the press that they would.’ Read the governing documents!”

Unduly diligent
Greenwald says that too many people – including “sophisticated” international investors and financial institutions – seemed to assume that they could only make money in Dubai, therefore overlooking the potential risks that accompany every jurisdiction in the world.

Given this mindset, proper due diligence and a thorough review of documents was too often considered to be a waste of time and resources, he says. “Going forward, I would hope that international investors will look at Dubai on its merits, which are strong, and would analyse and handle a Dubai investment as it would any other investment,” Greenwald says.

He adds, though, that there isn’t a clear enough divide between government and privately held – but government owned – entities, especially where the same individuals hold senior positions in both government bodies and government-owned private companies. “Too often, the same individual is in charge of both the private entity and the regulatory entity in a single sphere of activity, especially within some of the free zones, which creates confusion and conflicts of interest.

“The regulatory or government side management must be separated from the private side management. An aggravating factor is when that same individual then deals with the government agency and/or the government-owned private entity in his own personal capacity,” he says.

In the days that followed the initial standstill announcement, Abdulrahman Al Saleh, director general of Dubai’s Department of Finance, gave an interview to a local TV station and clarified that: “It is correct that the government owns Dubai World, but the decision when it was set up was that it should receive financing based on the viability of its projects, not on government guarantees. The lenders should bear part of the responsibility.”

Dubai World subsequently repaid US$4.1bn on an Islamic bond from Nakheel, which matured in December, after Dubai received a US$10bn loan from the Abu Dhabi government. At the time of going to press, Dubai World was working with creditors to reach a standstill agreement on the rest of its borrowings.

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