Dubai: Abu Dhabi Support - US$5 Billion Less Than Meets the Eye

Very interesting news item in Monday's The National.

Probably, most observers out there including me assumed that the US$10 billion committed to by Abu Dhabi in December for the last minute payment of the Nakheel bonds was in addition to the November US$5 billion sale of bonds by Dubai to National Bank of Abu Dhabi and AlHilal Bank.  That is, that Abu Dhabi had provided US$10 billion in additional aid on top of the  US$5billion committed to by these two banks.  US$15 billion, which when considered alongside the US$10 billion purchase by the Central Bank of the UAE in February 2009 (fronting for Abu Dhabi) meant US$25 billion in assistance.

As to the actual payment of funds, in an analysis of the Government of Dubai's 14 December press release, I noted that the language used suggested that the entire US$10 billion had not been disbursed.

The first of these beliefs was wrong.  The second appears to have been right.

Instead of providing new money of US$10 billion, Abu Dhabi has apparently purchased the US$5 billion commitments of NBAD and AlHilal.   That means that the  December net commitment was only US$5 billion.  In other words the total  amount from Abu Dhabi Inc in November and December was US$10 billion not US$15 billion.  And, thus, the total aid to date is only US$20 billion not US$25 billion.

But there's more to the story:  the disbursement of funds.  Two points.  The quantum of funds disbursed so far.  The method of disbursement.  Both of which I think show that Abu Dhabi is keeping Dubai on a rather short leash.

As I commented in an earlier post, these two banks gave a commitment to buy the bonds over one year with a modest immediate cash payment. And, as I noted at the time, this gave Abu Dhabi continuing leverage over Dubai.  It seems that this pattern continues with the December US$10 billion.   Instead of cash disbursements of US$11 billion in November/December, the amount is roughly half that, leaving approximately US$5 billion to be drawn down over some unspecified period.

What's also intriguing is the comment attributed to unnamed bankers that the Abu Dhabi Department of Finance made the payment to settle Nakheel's bonds directly.  That sounds as though DOF paid the agent and did not remit the funds to Dubai to then pay the agent.  In this modern age there's no reason why the DOF couldn't have transferred the funds to Dubai and let Dubai make the payment.  There are really only two reasons why something like this would be done.  Either (and I think this is highly doubtful), Abu Dhabi was concerned that the funds would be diverted by Dubai.  Or to make the point of Dubai's dependence very clear to everyone.

My sense is that both of these tactics are intended as ways of keeping Dubai on a short leash.  A very short leash. The remaining US$4.9 billion will probably be disbursed on an "as needed" basis.  At each disbursement Dubai will have to ask for funds, probably provide some sort of justification/explanation and thus be reminded of its dependence.  As well, Abu Dhabi will be able to condition disbursement on compliance with previously agreed deliverables.   Or, if it wishes, to extract a new quid pro quo.

On that topic, I still think that Abu Dhabi's goal is primarily political, though I expect that Shaykh Khalifa is also keeping a sober eye on the absolute amount of spending devoted to Dubai.  It is the Abu Dhabi way.  And to be clear, I don't think Abu Dhabi intends to be vindictive with Dubai or needlessly embarrass the Emirate or Shaykh Mohammed.

A bit more on the article's explanation for the reason for buying out NBAD and AlHilal's commitments. As banks both institutions would have had to  reflect diminution in  value in Dubai bonds in their financials.   If held as trading assets through their income statements.  If as available for sale, through the fair value reserve.  And, if as held to maturity, by disclosing in a footnote current market price versus historical cost carrying value.  Any of these steps could potentially impact their credit ratings as well as their Basel II capital adequacy ratios.  As a government, Abu Dhabi is immune from the requirements of IFRS as well as  detailed disclosure of its financial affairs.

One final comment, I think it would be a very good idea for Dubai to reflect carefully on the handling of the December announcement of Abu Dhabi's support.  If the market finds out now that in effect only US$5 billion in additional aid was given instead of US$10 billion, then it may conclude that an attempt to mislead was made.  Or that there is some fairly basic skill lacking.  Neither of which will be helpful at this critical juncture - especially since so much confidence has already been eroded.