Dubai seen selling assets, issuing bonds to pay debt Wednesday, 08 September 2010 03:52

ubai may have to step up asset sales and government borrowing as a heavy debt repayment schedule for state-linked companies over the next few years puts pressure on government finances. As the Gulf emirate recovers from a burst real estate bubble it forecasts a budget deficit of up to 2 percent of gross domestic product this year. While that is very low by global standards the government will need to increase revenue in the face of its huge debt burden, analysts say.

With state-owned companies sitting on more than $100bn in debt, some $30bn worth of loans and bonds of predominantly state-linked firms are due to mature in 2011-2012. State flagship Dubai World, which leads the pack of debt-ridden enterprises, now owes $39.9bn, according to a document seen by Reuters last month, much higher than widely expected debts of mid-$20bn.

The conglomerate is scrambling to put together a debt restructuring plan that could involve the sale of up to $19.4bn in assets. They may also now include ports firm DP World, whose debt was previously ring-fenced. “With 2010 public revenues projected at $8bn, Dubai’s fiscal muscle seems weak compared to off-balance sheet guarantees it may have committed itself under the Dubai World restructuring proposal,” Bank of America Merrill Lynch said in a note to clients.

Bank of America Merrill Lynch estimates Dubai’s debt could be as high as 170 percent of GDP. In comparison, the debt burden of Greece, which was saved from bankruptcy by a 110bn euro ($141bn) bailout by the European Union and International Monetary Fund this year, is seen at 103 percent of GDP for 2010.

Dubai’s debt crisis is dragging down the United Arab Emirates’ economy, which is projected to grow 2.1 percent this year, the slowest pace in the region. Abu Dhabi is set to run a budget deficit for a second year in 2010 following its $10bn bailout of Dubai last year. “The large implied funding gap is likely to lead to renewed pressures on Dubai and ultimately the Abu Dhabi sovereign through implicit support and increased external issuance,” said Bank of America Merrill Lynch. Asset sales along with bond issues are Dubai’s best option to boost revenue because other measures would not generate enough cash on time to plug debt holes, analysts say.

Other prized assets that Dubai could sell in the future are the Jebel Ali Free Zone and Dubai World stakes in the Atlantis Hotel and casino operator MGM Resorts International. “There is little doubt that the government would have to sell some of its assets to raise funds,” said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.

Dubai’s fiscal deficit is also prompting the government to look at new ways of boosting income, such as cutbacks on fuel subsidies, municipal taxes and through various fees. Eager to maintain its status as a low-tax business centre, however, the emirate is likely to opt for small increases in indirect taxes, leaving direct taxes unchanged and cutting spending instead. It announced last week that in the coming years new government projects would only start on merit.

DEBT ISSUANCE

A packed debt repayment schedule in the next two years could put pressure on Dubai to issue debt. If that proves difficult, the Gulf state may have to seek funds from neighbours Saudi Arabia, Kuwait or Qatar, analysts say.

“They have quite a lot of redemptions coming up for 2011 and ... in 2013 and 2014, so it seems like they do have a need but it is whether or not they will be able to get an attractive yield to issue now,” said a strategist at BNP Paribas in London.

Dubai’s finance chief told Reuters last month the emirate would keep its options open about a potential debt issue later this year but was not under pressure to go to the market. Dubai officials met with fixed income investors in Asia last month, seen as a sign a bond issue could be on the cards.

“They could probably do $500m to a billion, much beyond that will be tricky,” said a fixed income investor. “Asian private bank money is still quite hungry for yield. A seven-year piece of Dubai paper with a nice yield to it would probably do quite well.” The government’s utility company DEWA attracted $11.5bn in bids for a $1bn bond in April but had to pay a generous 1.25 percent premium to the underlying sovereign. The yield on Dubai’s paper maturing in 2014 has come down to 6.8 percent from a high of 10 percent in February. reuters

| More...