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Dubai is NOT Bankrupt; Negative Ramifications for US Equities

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November 27, 2009 – Comments (2)

There is a lot of misinformation floating around about the default of Dubai World.  Specifically, from people thinking the entire country of Dubai is now bankrupt.

Dubai World runs investment projects for the country as a separate entity.  Primarily, these investments are real estate projects all over the world and in Dubai.  Specifically stated in their charter is that the government of Dubai does not in any way guarantee the debts of Dubai World.

The issue here is the investors who are stuck holding the bag and aren't sure how many cents their dollars invested in DW now are worth.  DW does not have readily accessible financial statements, and until this most recent news, their debt was rated A3, which is the same grade as Verizon.  Savvier investors probably could've surmised the value of DW's holdings with external real estate data and the particular absence of the super rich playboy shiek clientele they target with their projects. (For instance: their islands of the world project was bought out entirely by private developers who subdivided the islands to make them more affordble instead of elite-wealthy world travelers looking for places to moor their yachts while they drop gobs of money).  However, investors like Abu Dhabi, are probably wondering why American financial ratings agencies were only on the scene post-mortem.

There is a lot of distrust in the American financial system right now due to plunging dollar values and world systemic financial risks introduced by the events that culminated with Lehman.  This latest fiasco, will have a further negative impact on US equity markets by furthering feelings of distrust and uncertaintity.

 

2 Comments – Post Your Own

#1) On November 27, 2009 at 8:42 PM, ChrisGraley (99.77) wrote:

I don't know about anyone else, but I personally wasn't worried about Dubai as much as much as Islamic contract law and how such a default would increase perceived risk in the Middle East. The structure of the Sukuk isn't that cut and dry and is open to interpretation.

I have heard that in this particular contract that investors would seek redress under English law. (Which opens up another can of worms that I'll get to in a moment) Even if that is the case, since Dubai World has some of Dubai's sovereign assets on it's balance sheet, Dubai courts will most definately put that English ruling under review.

The big question here is "Who currently holds the debt?" If it is a mix of local banks and international banks, then a restructuring deal has at least a small chance of being done secretly in the background. This would be the best case scenario! If on the other hand, the banks sold these as distressed assets to investors like hedge funds or distressed asset investors, those investors will fight to the death to get every penny.

Dubai is between a rock and a hard place here. If they seek to keep their assets,  then they set a precedent that the bonds do not have the perceived sovereign guarantee, which will cause investors to flee not only alot of Dubai bonds with that perceived guarantee, but bonds all over the Middle East as well. If they hand over the assets to foreigners, (especially the US), their own population will view them as weak and inept.

Now the can of worms I was talking about! Just the fact that the case would be tried under English law would be humilitating to the government, but if the word "interest"  is even mentioned in court and gets picked up by a media outlet like Al Jazera, there will be riots in the streets! Islamic law forbids interest being paid and any inference that the government may have arranged to pay to the infidels interest could cause chaos for most Middle East countries. Men seeking religous power in any Middle East country with these types of arrangements would have a field day with this.

So what you wind up with will probably be some type of kangaroo court where either the investors will be censored from talking about the basics staples of English contract law. (Islamic bonds will tank shortly after the first day in this scenario.) Or you don't censor it and allow the Islamic revolt. (Islamic bonds tank in that scenario too because foreign investors do not want to be the targets of the fundamentalists.)

I don't see a lot of ways that this could be spun to be other than a total mess!

They good news is that all parties have a few months to think about it and if I can figure that out, so can they.

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#2) On November 28, 2009 at 2:46 PM, russiangambit (98.75) wrote:

The only thing that surprised about the whole Dubai panic is that US bails out several financial institutions at the cost of several hundred billion dollars and nobody blinks an eye, but DW only has 59 bil outstanding and it is a big deal. Go figure.

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