Saudi Capital Markets Authority Announces Corporate Governance Seminar For February

The Saudi CMA has announced it is organizing a corporate governance seminar in co-operation with the Swedish Chamber of Commerce.  The meeting will be held in Riyadh February 9.  Press details here.

GCC Monetary Union: Imminent Meeting to Form Gulf Monetary Council

AlRiyadh newspaper quotes Dr. Nasir Al'Uqud, Assistant Deputy Secretary General for Economic Co-Operation of the GCC as saying that the Governors of the Central Banks of Bahrain, Kuwait, Qatar and Saudi Arabia will meet in the coming weeks to form the Gulf Monetary Council ("GMC") as a first step in the creation of a unified currency for the GCC and a GCC Central Bank.

Oman and UAE are not participating in either the common currency program or the GCC Central Bank.  Apparently the UAE was miffed that the CB will be headquartered in Riyadh as opposed to Abu Dhabi.  It announced this May that it was not participating.  Oman had advised its withdrawal back in 2006 (or early 2007?).

The GMC is charged with taking all the steps necessary to establish monetary union, including the timing thereof and the issue date of the new common currency.    the specifics of the unified currency and its issue date as well as setting up the basic infrastructure.  Associated with the common currency will be the development of plans to co-ordinate GCC economies  and set up related units to implement and monitor that process.

The original plan was to issue the unified currency in 2010, but the GMC will have the right to determine the timing.   The article notes that unnamed Gulf officials expect it to take several years for the currency to be issued.

Hope remains that Oman and the UAE can be persuaded to join at a later time.

Dubai World Restructuring - Options

The National (Abu Dhabi) has an article titled Full Repayment Is Option For Dubai that has left me scratching my head.

Here are three quotes along with some comments in blue italics.

1. “They made clear there were a number of options the Government of Dubai saw as feasible and desirable for Dubai World and repayment in full was one of them,” said a person at the talks who declined to be identified because the meetings were private.  AA:  That means the Government of Dubai sees other "feasible and desirable" options.  Would one of those be refusal to pay anything?  A haircut on principal?  Conversion of the debt into season passes at Wild Wadi?   
   
2. Full repayment would be the preferred option for the creditors, represented by the British banks RBS, Standard Chartered, Lloyds and HSBC, with the regional banks Abu Dhabi Commercial Bank and Emirates NBD representing the Gulf.  AA:  Great minds think alike.  That was AA's strategy as well when he was active in the underwriting and funding of debt.  In fact, getting back one's principal (plus interest) was a key business principle in the debt markets - at least at that time.     
   
3.  “We will have to see what timescale they [Dubai] are looking at as a feasible repayment period,” one banker who asked to remain anonymous said yesterday. “If they can come up with a plan to repay over a period of, say, five years, with a commitment to maintain interest payments over that period, we would have to consider that.”  AA:  Does this mean that if the proposed repayment were over six years, these banks would refuse to consider it?  And precisely what would they do in such a case?  Ask the BBA to write a letter to Lord Davies  so he would have a word with Shaykh Khalifa?  When AA was involved in debt restructurings, we generally began by constructing a reasonably based cashflow for the debtor.  After applying some margin of safety, we could pretty much determine the required repayment tenor.  Working the other way around by positing a repayment tenor without reference to reality is a bit riskier.
   

First Dig Your Camel Out

3-0!

A Gem of an Investment: Damas

One of this blog's select group of readers raised a question about Damas and provided a link to an article in The National newspaper from Abu Dhabi.  I promised to put a few thoughts together in a post and belatedly am making good on that promise.

First, a bit of background to set the stage.

1. In Summer 2008 Damas offered 270.6 million shares of which 233.9 million were new shares.  36.7 were sold by Amwal al Khaleej Commerical Investment Company (Saudi Arabia)  as per the Final Offering Circular ("FOC").  As per page 72 of the FOC, the three Abdulla Brothers (Tawfique, Tamjid and Tawhid) would own more than 51% of the Company after the Offer.
   
2. Fees and expenses on the transaction were reported as US$10.4 as  (page 19 FOC).
3. In July 2008, Damas listed on the DIFX, now NasdaqDubai.
4. In December 2008, the Company changed its fiscal year from 31 December to 31 March with the following justification:  "The Board of Directors of the Company vide their resolution dated 22 December, 2008 has changed its Financial Year End from 31 December, 2008 to 31 March, 2009 due to the following reasons.
   i) Since the market conditions were very much volatile, the first part of 2009 would give the Company, some time to see how expansions could be made effectively in the later part of the calendar year.
   ii) All the Auditors were extremely busy at the end of the calendar year and feel pressurised to deliver and that it would be a better option to choose a lean period for audit reviews and for consolidation of more than 75 Group companies."    
5. On 12 October 2009, Damas announced the resignation of Mr. Tawhid as Managing Director and CEO "due to his disclosure to the Board of what is understood to be unauthorized transactions conducted by him.  The full extent of these transactions has not been ascertained at this time but the Company’s initial estimate is that these transactions could amount to approximately USD 165 million."
6.  On 15 October 2009,  the Board of Damas announced "the appointment of PricewaterhouseCoopers (PWC) as an independent auditor to examine the unauthorized transactions conducted by the former CEO and Managing Director Tawhid Abdulla."
7. On 4 November 2009,  the Company announced a Settlement Agreement with the three Abdulla Brothers to repay US$165 million over the following 18 months in three installments of US$55million due within each of the three six-month periods comprising that longer period.  Certain real estate was pledged as were 350 million shares of Damas to be taken in the event that the Settlement Agreement was not honored.

Now to more recent details.

On 16 December 2009, Damas published its September 2009 interim financials.

The following five notes particularly caught my eye:

(1) Note 6:  Provision Against Consignment and Receivables Exposure

"Included in unimpaired receivables (note 9) are debts amounting to AED 53 million (31 March 2009: AED 47 million) due from particular consignment debtors and AED 32 million (31 March 2009: AED 54 million) due from certain high net worth customers who are familiar and acquainted with certain Directors."  AA:  It would be interesting to know who these "high net worth" customers are who apparently forgot their credit cards or chequebooks at the time of  purchase.

(2) Note 11 Related Party Transactions

"The Executive Directors have provided personal guarantees amounting to AED 150 million (31 March 2009: AED 150 million) in respect of risks associated with unfixed gold lying with certain parties, dues from particular consignment debtors and certain high net worth and important customers (note 6)."  AA: I wonder if these "important customers" are among those who haven't settled their purchase payments yet.

(3) Note 12 Directors' Current Account

"The above balances relate to Mr.Tawfique Abdulla, Mr. Tamjid Abdulla and Mr. Tawhid Abdulla. Against the balance above there are loans due to these directors amounting to a total of AED 150 million which are subordinated to bank facilities.

Subsequent to the period end, the management has entered in to a Settlement Agreement with the concerned directors wherein they have undertaken to repay an amount of US$55 million within 6 months; an aggregate of US$110 million within 12 months; and an aggregate of US$165 million within 18 months; and, should there be any balance in excess of the US$165 million as a result of any findings arising from an ongoing independent investigation or otherwise, any such excess amounts in cash and/or unencumbered assets within 24 months. All payments are to be made in cash and/or unencumbered assets.

As part of the Settlement Agreement, the concerned directors have produced a list of assets that are potentially available for liquidation to be converted by them into cash and/or to be contributed to the Group as unencumbered assets to meet their obligations under the Settlement Agreement. Such assets consist principally of real estate investments in the Middle East and North Africa (including a number of residential and commercial buildings and units in the United Arab Emirates) and an investment in a shopping mall in Turkey.

As part of the Settlement Agreement, the concerned directors have pledged 350 million of their shares in the Company that would be transferred in whole or in part back to the Company in the event the terms of the Settlement Agreement are breached. These shares had a market value of AED 275 million as at 25 November 2009.

As at the date of authorisation of this financial statement, the process of independent valuation of the assets available for liquidation is still under process. An independent investigation is also ongoing into transactions undertaken by the former CEO and Managing Director of the Company. This investigation is being overseen by a subcommittee of the Board.

Subsequent to the period end due to increase in the price of gold and additional transactions the amount due from the directors was AED 635 million as at 25 November 2009 (net of loans due to directors amounting to AED 150 million)."  AA: There are several more interesting details in this note in the comparative table of outstandings and their movements, including the use of a company deposit to secure a related party's loan.  Presumably, one of the unauthorized transactions.  Or at least one hopes so.

(4) Note 13:

"* A subsidiary of the Company had provided a loan amounting to AED 294 million (USD 80 million) to Dubai Ventures Group Limited (“Dubai Ventures”) at a rate of interest of 6% p.a. which was due to be repaid in August 2009. On 18 August 2009 an investment agreement was signed with Dubai Ventures, wherein Dubai Ventures confirmed that all monies previously provided to it under the loan facility were held by it as money provided for investment purposes and would be transferred into a investment account over which Dubai Ventures would have discretionary management powers. Subsequently when the Group requested information as to the nature and value of the investments held in the investment management account they were informed that the account held shares in Damas International Limited with a value of only AED 73.5 million and that no other assets were available to the Company. Although discretion had been given to Dubai Ventures in respect of investment choice, the Board of Directors of Damas International Limited had not authorised Dubai Ventures to invest in shares of the Company. The Board intends to dispute Dubai Ventures actions in this regard and will seek to recover the full amount due under the original loan facility agreement.  For reasons of prudence a provision has been made amounting to AED 312 million against the total loan amount including accrued interest."

(5) Note 17 Going Concern

"The increasing spot price for gold has resulted in a decline in sales and an increase in margin calls from financial institutions from whom the Group obtains gold loans. These factors combined with the amounts withdrawn by a director (note 12) have resulted in a significant decline in the liquidity of the Company. It has also resulted in the Group defaulting on certain of their facilities subsequent to the period end and a number of financial institutions reassessing their facilities with the Group.

Discussions are currently ongoing with banks regarding renewal/restructuring of facilities and securing sustained funding to carry on its operations. As part of this process the Group has signed an agreement with certain institutions that may result in certain diamond inventory being sold at a loss in future as an additional cost of finance. Additional funding is required to ensure that the Company can continue its operations and meet its financial obligations as they fall due.

Whilst the results of the negotiations with the banks cannot be determined at this time, the Board of Directors has elected to prepare these financial statements on a going concern basis as they are optimistic that agreement will ultimately be reached with the banks."

Now to some commentary.

How did this happen?  

It appears from the timing that the conversion of the loan to Dubai Ventures happened during the tenure of the previous Managing Director/CEO.  Earlier I had raised a question as to what a jewelry company was doing making a commercial loan to another entity and whether this was ultra vires.  A glance at Damas' Articles of Association show that the answer to the latter question is a resounding no. 

Basically Article 1.4 (b) allows the company to anything that's not illegal.  As well, Article 15.3 would seem to permit the delegation of authority to engage in such transactions to the MD/CEO by the Board.

Of course, there is still the valid question of why this company got into the loan business, when it appears to have been in financial distress from unfavorable developments in its core business.  This loan was disclosed in Damas' 2008 fiscal financials issued in July 2009.  So the Board  cannot disavow knowledge, though its knowledge may have been post facto after the loan was granted.   It would be interesting to know the Board discussion that took place on this issue.

As indicated in Note 13, when the loan was not repaid, presumably because Dubai Ventures could not, it was converted to an investment account.  Not an untypical strategy to prevent the recognition of an impairment or a loss.  The AED64,000 question here is whether the MD/CEO undertook this decision on his own or the Board was involved.

What is also intriguing is whether Dubai Ventures inability to pay is evidence of a wider pattern of cash shortages or other financial distress within Dubai Inc.

What about the Settlement Agreement?

As is probably obvious from previous posts, AA has a particular fancy for settling obligations in cash.   As per Note 12 it seems that settlement can be made in "cash and/or unencumbered assets".   Since Damas is not a real estate investor (or at least AA hopes they're not), it would seem that settlement should be in cash.  Any real estate should be sold and the proceeds given to the company with the Abdulla Brothers bearing the conversion risk, not the Company.   

Also I'd note that Article 2.15 of the Company's Articles states:  "The Company may not take a lien over any of the shares."  Presumably legal work has been undertaken by clever counsel to make the pledge by the three Abdulla Brothers legally effective.

Bottom Line

When investing in a family company make sure you've got adequate control  at the Board over the family members' management of the company and signature authorities (enhanced requirements for Board approval is one technique), robust corporate governance actually implemented, and of course detailed disclosure of company affairs. 

The Deep View: Emerging Markets

The Financial Times's recurring column "The Short View" ran an article last Thursday on emerging markets, noting the stellar performance of emerging markets as well as some of the smaller "developed" markets.

Indeed the indices of some of these markets have increased dramatically.

There are some other considerations that might be relevant to investors.

Let's drill a bit deeper.

How is the local index constructed and is it dominated by one or a few companies? 

In other words is there enough diversification available in that market to deal with idiosyncratic risk?  Or does one need investments in other markets?  Very key questions for those whose philosophy is informed by the CAPM, the efficient markets theory, etc. 

The Dow Jones average is composed of some 30 stocks.  United Technologies has the largest share in that index with some 6.5%.  By contrast in Norway's OBX, Statoil accounts for a whopping 25.98%, Telenor 10.84%, and DnB Nor 9.64%.  Just three shares account for 46.5% of the index.

Another is what is the liquidity of the market?  Sometimes even the most inveterate punter wants to cash in his winnings.

If I'm not mistaken daily trading on the Ukrainian Stock Exchange maxes out at US$60 million.  Closer to "home" one could look at the monthly reports issued by the Bahrain Stock Exchange and learn that many stocks do not trade.  And that trades are often in small amounts.  For the month of November, BBK had the largest BD volume of shares traded at just short of BD 11 million (roughly US$29 million) - that was roughly 50% of the entire month's trading.

Other market factors that affect investors are:

1. Free float
2. Structure of market infrastructure, e.g., does one broker control the market as (at least) used to be the case in one GCC state
3. Balance of institutional versus retail investors in the market
4. Market practice - is insider trading a national sport?
   

And Now for Something Completely Different: Basel Fawlty?

Friday's Financial Times Lex Column had a comment under the title "Basel was faulty" which as you might guess coming in an "English" context reminded me of a long ago television series.

Is Basel II to blame for the financial crisis?

If there's no stop sign at the corner, do I just speed on through the intersection without looking for other traffic?

And, if I get hit, do I blame the lack of a stop sign or my own imprudence?

And perhaps equally as important, if I am the constable at the intersection, do I defer my own independent judgment to the traffic control signs that are present or not present?

And if there is an accident, do I blame the chap who did or didn't put up a sign?

Of course Basel II wasn't perfect.   Basel I wasn't either.  Regulators need to engage their brains in applying regulations.

There was a time when regulators would call their charges to admonish them, to warn them from  engaging in certain behavior when they saw something dangerous or stupid. 

Long ago, the last real central banker the USA had, crushed speculation in the silver market by telephoning the CEO's of major US banks and telling them to stop financing speculation in the precious metals market.  He also then rang up the commodities exchange to "suggest" that they change their margin rules.  The combination of margin call and no access to additional financing deflated the silver bubble quite nicely.  All done without an explicit rule.  And some would argue with a bit of ultra vires in regard to the change of the margin rule.

Dubai World Standstill

There's an interesting article in today's Gulf News "Bankers Expect "Standstill" Nod".

"Bankers expect Dubai World to make a formal request for a "standstill" on its $26-billion (Dh95.4-billion) debt at Monday's creditor meeting, but it could be more than a month before banks agree, bankers said yesterday."

As I read the law, all Nakheel and Limitless need to do to get an effective legal standstill in the UAE is to nip round to the special DIFC Court and persuade the judge to give them one as part of a company voluntary rescheduling proposal.  There is no requirement for any bank agreement to the standstill.  There is of course one to the voluntary rescheduling program - more than 75%.

And as I argued in my earlier post, it is likely that many jurisdictions will accept the DIFC proceedings as taking place under a reasonable regime and law.  Therefore, it's also likely that they will agree to hold enforcement in their own jurisdictions pending the resolution of the case in Dubai.

So this article is puzzling.  In effect the banks don't have to agree for a standstill to become effective.  Since they don't appear to have a  choice in the matter, what sense does it make to talk of the law as giving them an "incentive"?

I'd also note that in applying the DIFC bankruptcy law to these companies, the Government of Dubai has  in effect given itself the right to impose a standstill.  Though to be fair, the law includes important protections for lenders and represents an improvement over local law.

KFH Lawsuit Against Commercial Bank of Kuwait - Re Bank Boubyan Shares

AlQabas has an article on the above topic today.

Kuwait Finance House ("KFH") has filed suit to keep Commercial Bank of Kuwait ("CBK") from disposing of shares in Boubyan Bank that it acquired because of a failed "repo" agreement with The Investment Dar ("TID").

KFH which has KD 44 million of exposure to TID apparently is arguing that CBK should not be allowed to sell the shares but rather that these should be placed at the disposal of TID's creditors.  As I understand it (and note that caveat), KFH is arguing that CBK is just another creditor of  TID and should share the collateral with other lenders.  The amount involved is significant.  At the last closing price, some US$387.5 million.  If you'll recall the estimate of assets versus liabilities, the creditors believed there was likely to be a shortfall in TID's repayment.  So including these shares in  TID's "estate" would improve the overall payback rate roughly 9 to 10%.

In any case, as per the article, the High Court has transferred the case to the Experts Department.

Some background:

1. Boubyan Bank ("BB")  was formed in 2004 as an Islamic Bank.  
2. In December 2008 TID sold CBK its BB shares (19.16% of BB) with an option to repurchase.  In effect what appears to be a form of "repo".
3. Around this time NBK received approval from Kuwait Central Bank to purchase up to 40%  of BB.  NBK is interested in BB in order to expand its franchise into Islamic banking.  For those who don't know, NBK is the premier non Shari'ah bank in Kuwait and a very strong contender for that position throughout the Arab world.
4. In May 2009 CBK announced that TID had failed to buy back the shares within the agreed time frame. And therefore it was taking control of the shares.
5. June 14 NBK announced it had agreed to buy the shares from CBK. The price  was roughly $420 million.
   
6. On 16 June responding to a motion from TID,  the Kuwaiti Court stopped the sale pending determination of ownership.
   
7. In July/August 2009, KIA auctioned its 19.8% share in BB.  National Bank of Kuwait  won 13.2% and Securities Group 6.6%.  NBK previously held 14.3% or so.  After the auction, it held 27.5% of BB and was the largest shareholder. 
   
8. NBK acquired Securities Group's shares plus some additional shares.   It is now the largest single shareholder in BB with some 40%.   And at the limit of shares it may own without further approval from the Central Bank of Kuwait.
   

Happy New Year!

كل عام وأنتم بخير

The Banker: 2009 “Best Bank” Awards by Country

The Banker has announced the winners of its award for 2009 Best Bank in each country.

Click on that link to read the rationale for the selection.  As always, it's important to read the fine print to determine what the criteria for evaluation were.   I recall reading a ranking of a university where two of the criteria (apparently equally rated with the rest of the criteria) were the survey taker's view on the beauty of the campus and the vigor of the social life. 

Here are the relevant GCC winners:

1. Bahrain - Ahli United Bank
   
2. Kuwait – National Bank of Kuwait
   
3. Oman - Bank Muscat
   
4. Qatar – Qatar National Bank
   
5. Saudi Arabia – Saudi British Bank
   
6. UAE – First Gulf Bank
   

And in Lebanon, BLOM!

Societal Attitudes Hold Back Saudi Women - Not Religion

It's fairly typical that when a businessman fears a competitor he seeks to disadvantage or bar them from competing.  And usually tries to find some high sounding reason to disguise the true reason.

It's refreshing to see this poll disabuse the notion that keeping women in an inferior state is founded on  Islam.  Rather it's founded on (a) traditional societal beliefs which have been conflated with Islam and (b) fear of competition. 

When a nation does not employ all its capital - human, financial, etc - its achievements are lower than if it did.

New Basel Committee Consultative Documents

The BIS BCBS has released two consultative documents today:

1. International framework for liquidity risk measurement, standards and monitoring
   
2. Strengthening the Resilience of the Banking Sector

Emirati Women Hold AED 12.4 Billion (US$3.4 Billion) in Investments

Raja AlGurg (Al Qurq), President of the Council of Dubai Businesswomen, said at a press conference held in Dubai to announce the seventh competition for Emirates Prize for Businesswomen that there were 11,000  businesswomen in the UAE.  4,300 in Dubai, 3,200 in Abu Dhabi.  With AED12.4 billion (US$3.4 billion) in investments in a diverse range of assets: hotels, real estate, buildings, shares, etc.

Earlier post on women's wealth in the GCC.

Qatar National Day

Happy National Day

Dubai: Sign of Cashflow Problems at the Government Level?

Bloomberg reports that "A new law “requires government entities which enjoy financial independence as well as government companies to transfer surplus income to the government’s treasury, considering it to be public income,” according to an e-mailed statement from the ruler’s office."

Some reactions:

1. The definition of surplus income is unclear.  Does this mean that only net income is to be transferred?  As say, opposed to cash received from the collection of receivables?  Or cash on hand? Over what period is the surplus determined?  Immediate needs?   Needs over the next 'x" months?
2. While a prudent cashflow step, the mobilization and centralization of cashflow is also a tactic used by entities experiencing cashflow problems.  The tricky issue in such situations is reversing the cashflow when the contributing unit needs cash. 
   
3. Does this co-mingling of funds belonging to "independent" government owned companies like DEWA and Investment Corporation of Dubai with sovereign government entities' funds undermine the assertion that they operate separately from the sovereign?   
   
4. Or is this a revision of existing dividend policy at the commercial companies?  If so, how does that affect (a) their creditworthiness and (b) existing covenants on any debt they have?  

These questions are not only pertinent to existing lenders but to lenders contemplating an extension of  new credit.

I think that this step could well be a sign of cashflow distress at the Government.  And coming so soon  after the recent US$10 billion rescue bond from Abu Dhabi, perhaps a condition of that financing.

And therefore perhaps further support for my earlier post on the relative positions of the two Emirates.

Cobalt IPO Follow-Up

Here's the first day's trading results.

Generally IPO offering prices are set so that there is an initial price rise.

Anyways, don't be discouraged.  This time it's different.  It really is.  Trust me.

Abu Dhabi/Dubai: Who's in Control?

Following Monday's surprise announcement, there's been discussion about the terms of the deal between Abu Dhabi and Dubai. In short which Emirate has the upper hand? 

What follows is a re-worked comment to an article at The Emirates Economist blog. There is a discussion there along with some other useful posts, which I suggest those interested in this topic take a look at.

Because details of the funding and any side agreements have not been revealed, we have no way of knowing.

Despite these limitations, we can engage in some hopefully informed speculation.

My own view is that Abu Dhabi has the most leverage.

I look forward to hearing your views, particularly those with different positions.  This is after all a "suq" and one should never take the first price (or opinion) as the last word without a big of haggling.

In large part though not exclusively, I've relied heavily on the 14 Dec Government of Dubai announcement. There are some risks with basing an argument on this document as to do assumes that it was crafted with each word and phrase carefully pondered before its selection That may not have occurred for time and what might be described as "cultural" reasons.

First, the funding itself.

I'm reading two statements from the press release to mean that funding is being provided in stages and with conditionality. First, "The Government of Abu Dhabi has agreed to fund." Not has funded. Of course, on the day of the announcement it's highly unlikely that funds would have been disbursed. The deal was probably struck hours before the release was issued. But there is another indication. In a following paragraph, it states that use of the remaining US$5.9 billion (after the apparent preference to Nakheel sukuk holders) is conditioned upon Dubai World securing creditor agreement to a standstill.

While there's no way of knowing for certain at this point, it sounds like that cash is not yet in hand. I'm guessing (hopefully an informed guess but note that word) that the funding is going to be phased in as needed and as milestones are met. Why? Because this is the tactic that Abu Dhabi took with the recent US$5 billion sale of the second tranche of the US$20 billion bond issue. As you'll recall while NBAD and AlHillal subscribed for US$5 billion, they only paid in US$1 billion immediately with another $1 billion to come within a week or so and then the remainder over the year. It would seem likely that Abu Dhabi would continue the same tactic rather than giving a carte blanche to Dubai.

If this analysis is correct, Abu Dhabi has tremendous leverage over Dubai. Particularly, if negotiations with creditors are difficult. And even more so because I believe that there are more economic shoes to drop in the Emirate (as described below).

There is I admit a second interpretation here – Dubai has the funds or will have them all shortly. And that this statement is designed to put pressure on DW's creditors to conclude a deal.

Second, the form of the financing.

It would have been quite easy for Abu Dhabi to have subscribed to the remaining tranche of the existing US$20 billion bond offering. And to use surrogates – the Central Bank or commercial banks as was recently done. And much quicker since legal documents for these existing bonds were already in place. As well, there was ample unfunded capacity on the second US$10 billion tranche. As noted above, at least US$8 bllion.  So Abu Dhabi's incremental purchase in the existing bond issue could have easily provided funds for the Nakheel bond.

So why wasn't this route taken?

One answer is of course to make the commitment of Abu Dhabi clear. But, by and large the market saw the hand of Abu Dhabi behind the Central Bank and the two commercial banks' purchases. What is the benefit? Discretion. As public entities, both the Central Bank and commercial banks would have to disclose material terms of the bonds – interest rate, repayment and very importantly if there were any material conditions – pledge of collateral, options to acquire assets, etc. – associated with the bonds. They would also be obligated to report any material changes to the bonds' terms or any delays in repayment. In a state to state deal, particularly one between two absolute rulers, disclosure can be what the two parties want. There are no Central Bank or listing regulations. Nor IFRS to deal with.

A direct state to state deal also puts Abu Dhabi's hand a bit closer to Dubai's throat, though it also puts Dubai's hand on Abu Dhabi's. A default to a commercial entity would have to be reported. There is more opportunity for discretion in a government to government deal.

Third, the relative positions of the two parties.

In the context of Dubai's debt, US$10 billion is not solution. It's temporary life support. It's likely Dubai will need more assistance in dealing with its debt. There are the indications that the Emirate itself has a cashflow problem: trade creditors to the government are reportedly among those with past dues. As well, even with bankers and investors' well known affliction of financial ADD, Dubai is likely to find its access to financing constrained for a while. The winding down of the real estate machine, which has driven a good portion of economic "performance", is going to have more than one bout of knock-on effects on the economy.

If so, there will be plenty of future opportunities for Abu Dhabi to apply pressure.

Dubai's main leverage is a Samson-like bringing down of the temple. A weapon perhaps more useful as a threat than for actual use as Dubai is likely to be ground zero in any such application.

Fourth, Abu Dhabi's primary goals may be more political than economic. The more dependent Dubai is for financial support the more it will have to accommodate itself to enhanced pre-eminence for Abu Dhabi and to the latter's policies and wishes.

In this context allowing Dubai to retain its flagship assets and its "face" may be small prices to pay.

Ride Into the Future: TED Sixth Sense

Incredible India!