Dubai gets $10B from Abu Dhabi to cover debt

[December 14, 2009]  DUBAI, United Arab Emirates (AP) -- Dubai got a $10 billion lifeline from oil-rich Abu Dhabi on Monday, securing a last-minute cash infusion aimed at preventing a default that risked sparking broader fears about the city-state's shaky finances.

Abu Dhabi's bailout offered the clearest indication in months that it was willing to at least partially back its glitzy neighbor. The $60 billion in debts shouldered by Dubai's chief state-owned conglomerate, Dubai World, and the city-state's unwillingness to fully stand behind the company has seriously tainted the emirate's creditworthiness.

Dubai World had been up against a Monday deadline to repay a pile of loans from its Nakheel property division. Some $4.1 billion of the bailout money will be used to pay off those bills. The news sent Dubai's main stock market soaring.

"We are here today to reassure investors, financial and trade creditors, employees and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Sheik Ahmed bin Saeed Al Maktoum, chairman of the Dubai supreme fiscal committee, said in a statement. "Our best days are yet to come."

Dubai -- which owes lenders more than $80 billion including Dubai World's debts -- said the rest of the funds provided by Abu Dhabi will be used to cover the conglomerate's interest expenses and general business needs through the end of April, and to pay bills owed to "existing trade creditors and contractors."

Bankers said the last-minute cash injection from the UAE's richest sheikdom signaled that the seven-member federation was taking a nationwide approach to tackling Dubai's problems rather than leaving the struggling emirate to fend for itself.

Dubai is the second-richest of the UAE's semiautonomous city-states, but Abu Dhabi holds nearly all the country's oil wealth and controls the federation's presidency. Dubai's ruler is the UAE's vice president and prime minister.

"This is a very significant development," said Marios Maratheftis, head of regional research at Standard Chartered Bank. "It shows once again there is a one-country approach in dealing with the crisis, which is positive."

Investors cheered the news, which provided some clarity in a crisis that erupted late last month when the conglomerate unexpectedly said it was seeking new terms on repaying roughly $26 billion of its debts.

The Dubai Financial Market's main index shot up 10.4 percent by early afternoon. Abu Dhabi's stock market jumped 7.8 percent. Stocks in Asia rebounded from earlier losses after Dubai's announcement.

Fahd Iqbal, a Dubai-based analyst at Middle East investment bank EFG-Hermes, said the rally was to be expected but urged caution.

"This announcement constitutes a specific bailout of Nakheel, suggesting that as an entity (it) was deemed to be 'too big to fail,'" he said. "It does not, however, constitute a bailout of Dubai Inc. or Dubai World as a whole and this is important to highlight."

Nakheel is a property developer and hotel operator best known for building manmade islands in the shape of palm trees and a map of the world off Dubai's coast.

Dubai World said in a separate statement it welcomed the financial support, which will provide "funding and a stable basis" for a restructuring the company announced last month.

The company said it is pushing ahead with talks to convince lenders to agree to a "standstill" -- effectively a delay -- on repaying some of its debt.

"As long as a standstill is successfully negotiated, Dubai World has assurances that the government of Dubai ... will provide financial support to cover working capital and interest expenses to ensure the continuity of key projects," the company said.

Dubai created Dubai World -- whose sprawling holdings range from ports to real estate and luxury retail -- to diversify its economy and boost its international clout. Much of the growth was fueled by cheap loans. As the bills came due, Dubai struggled to repay as its economy was battered by the global economic downturn.

In another move aimed at bolstering investor confidence, Dubai's government said the UAE's central bank, based Abu Dhabi, is prepared to provide support to local banks.

Dubai also said it plans to introduce a reorganization law that could be used in case Dubai World is "unable to achieve an acceptable restructuring of its remaining obligations."

A person close to the Dubai government said the new law provided a legal framework for addressing corporate debt, though it did not mean a bankruptcy filing by state-owned companies was certain.

"The current bankruptcy law is untested," the person said. "Dubai World needed a legal process to go through. The government was very focused on creating something that would be fair and transparent to everybody."

He insisted on anonymity as a condition for briefing reporters on a conference call.

It was not immediately clear what, if anything, Abu Dhabi would expect in exchange for Monday's funding. Analysts had said an Abu Dhabi bailout could result in the oil-rich emirate exerting greater influence on its neighbor going forward.

But the individual close to the Dubai government said the money came with no strings attached.

"Let me be clear: Dubai has not given anything up. There have been no conditions on the funding," he said.

The source close to the Dubai government said it was premature to discuss what assets Dubai World might be willing to sell to pay additional bills, though he added that "all options will be discussed."

The money is the latest example of Abu Dhabi stepping in to help.

The central bank pumped $10 billion into Dubai earlier this year in the form of low-interest loans. Another $5 billion in aid was raised from two Abu Dhabi state-controlled banks last month.

The central bank has already been guaranteeing bank deposits since October 2008 and earlier this month said a new liquidity facility was available to banks, including foreign institutions in the country.

[Associated Press; By ADAM SCHRECK]

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