Dubai US$5 Billion Debt Sales - Less Than Meets the Eye and An Explanation for the Restructuring at Dubai World

Two stories came out today with contradictory themes:

1. The first was that Dubai had successfully sold US$5 billion in bonds from the Second Tranche of its US$20 billion program.  
2. The second was that Dubai announced the appointment of a Chief Restructuring Officer at Dubai World and more importantly asked creditors for a payment standstill until May 2010.

The explanation for this dissonance is in an article in Thursday's The National (Abu Dhabi).

It seems that the US$5 billion sale was actually US$2 billion in cash now with the promise to buy the remaining US$3 billion over the next year.  

US$ 2 billion is not enough to address the Emirate's  near term cash flow needsd - payments to suppliers and debt maturities, including  an AED12.85 billion Sukuk (US$3.5 billion bond) issued by Nakheel. 

So the Emirate was left with no option but to ask for a six-month debt repayment standstill.  

Looking behind this, what are the conclusions we should draw.

1. As I posted earlier and as The National confirms, this is an Abu Dhabi Inc. deal.  It is not a private sector non governmental deal.  
2. Despite attempts by Dubai to spin the bond sale as proof of access to the market, the Emirate  has only limited access.  If it did, it would have raised more money and not needed to tap Abu Dhabi again.  Today's announcement is likely to further restrict access.  
   
3. Abu Dhabi is still supporting Dubai but extending the time over which the cash is infused.  This presumably is to put pressure on Shaikh Mohammad to make some real changes. Until just recently Dubai was talking of raising the full US$10 billion of Tranche 2.
4. It is also a signal to the market - to other creditors - that Abu Dhabi is not necessarily the lender of last resort for Dubai.
   
5. The sudden dismissal earlier this week of Dr. Sulayman at DIFC and the replacements at the IFD are probably related.  And perhaps preparation for today's bad news.  Change that hopefully creditors will believe in.  New sober faces.  The guys who will use both sides of the Xerox paper.
   
6. Expect to see more evidence of a fundamental change in Dubai's strategy.  The new CRO at Dubai World is just the first step in this direction.
7. The standstill request is going to send shockwaves through the financial markets. Look for a reaction at the Dubai Exchange and some spillover elsewhere in the GCC. 
8. The credit markets - already struggling with Saad, AlGosaibi, The Investment Dar, Awal, The International Banking Corporation, Global Investment House - are likely to react negatively.   Not just foreign lenders and investors but also regional ones.  Spreads on Dubai Credit Default Swaps are going to increase.  Banks and bond investors are going to become more cautious across the region.   
   
9. As a result, Dubai's market access is going to be reduced.  It is going to have to focus primarily on restructuring its existing debt.  New financing, if any, is likely to be relatively modest compared to the past.  
10. This will have a direct impact on the local economy which was largely fueled by  an intense multiplier effect of a series of transactions of apparent (and note that is a deliberate word) increases in value - but whose primary basis was debt.  
    
11. Even Aabar may be impacted.  It could wind up paying more for the refinancing for its recently announced six month US$1.625 billion club loan.
    

The announcement seems to have been timed  to the Eid holiday - no doubt in the hopes that some of the shock will dissipate before markets begin trading again next Monday.

There will be more to come.  And the prognosis is not for good news.