Dubai: Abu Dhabi provided its flashy but debt-laden neighbor Dubai a $10 billion lifeline to last its troubled flagship company until the end of April, heading off a bond default on payment day and sending Gulf markets higher.
Dubai World, the conglomerate at the centre of a $26 billion debt storm, still needs creditors to agree a standstill on a massive restructuring in order to get financial support to cover working capital and interest expenses.
And analysts said the emirate's troubles were not over.
"We've still got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing," said Saud Masud at UBS. "The big question is how are they are going to do this next step?"
For now, Abu Dhabi has given Dubai World some breathing room. Some $4.1 billion of the funds are earmarked to repay its property developer unit Nakheel's Islamic bond due for payment Monday -- potential relief for investors who had marked the bond's price down to less than half its face value at one stage last week.
"The (agreement is) on condition of the company being successful in negotiating a standstill previously announced with remaining creditors," a Dubai government source said in a conference call with journalists.
A government statement said the remaining funds would support Dubai World until the end of April next year.
Dubai also said it would set up a new bankruptcy law, similar to US and British practices, and which would take effect immediately, in the event Dubai World needs to seek protection from creditors. The law is due to made available later on Monday.
"The fund will also be used for the satisfaction of obligations to trade creditors and contractors and discussions with contractors will begin shortly," said the source, who spoke by telephone and would not give his name.
Dubai World rocked global markets on November 25 when it asked creditors for a standstill on $26 billion in debt mainly linked to its two property firms, Nakheel and Limitless World.
"This is kind of above and beyond what people expected. It is a crucial and essential lifeline," said Chief Economist at Banque Saudi Fransi-Credit Agricole in Riyadh, John Sfakianakis. "That should bring in a lot of confidence. Basically Abu Dhabi is footing the bill. It will take time for the implications to unfold. I highly doubt this kind of money has no strings attached. There was no other choice for Abu Dhabi but to bail out Dubai. The (United Arab Emirates) federation would have been at stake."
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Dubai's benchmark stock index led a surge on regional markets, jumping more than 10 per cent, while Abu Dhabi rose 7 per cent in early trading. The US dollar jumped against the yen on the news, while Asian stock markets rebounded. US S&P stock futures jumped 0.7 per cent, reversing early losses, and European shares were also higher.
Abu Dhabi, the largest member of the United Arab Emirates and with most of the oil resources, had long been seen as a white knight for its heavily leveraged neighbour, Dubai.
Conditions?
But it was unclear on Monday what conditions the bailout entailed. There had been speculation Dubai would be forced to hand over prized assets, such as Emirates airlines, in return for assistance.
"This is a government to government fund, the terms of that fund are internal to the government of Abu Dhabi and Dubai," the Dubai government source said. A government official said there were no strings attached.
The government source said the restructuring process could include asset sales, but they would be limited to Nakheel and Limitless, excluding Istithmar World assets, which owns US luxury retailer Barneys, or its port operator DP World.
The property unit's assets included man-made islands shaped like palms and a map of the world in Dubai, as well as mixed-use real estate projects in Indonesia and Malaysia.
More Debt Looming
The UAE central bank said it would back local banks who have exposure to Dubai World in the wake of the news, which was the least expected of all options Dubai had available.
Dubai World said it would continue to work with creditors to negotiate a standstill in an orderly way.
Dubai's creditors, which include London-listed Standard Chartered, HSBC, Lloyds and Royal Bank of Scotland, along with United Arab Emirates lenders Abu Dhabi Commercial Bank and Emirates NBD, effectively have until Dec 28 to agree to the standstill, when the Nakheel bond's grace period ends.
The excess would be used to help government-controlled Dubai World up until the end of April 2010, the Dubai government said.
Sheikh Ahmed bin Saaed al-Maktoum, chairman of Dubai's fiscal committee, said Dubai's government would act at all times in accordance with market principles and internationally accepted business practices and the emirate would remain a strong and vibrant global financial centre.
The fund news was welcome news for jittery investors but still left questions about how Dubai would manage billions more in debt obligations coming due next year.
The government source said other government related entities such as Borse Dubai, which has $2.5 billion of debt maturing in February, and Dubai Holding, which has about $1.9 billion maturing in the first half of 2010, would be assessed on a "case by case basis" and the Dubai World deal was not an indication of future deals.
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