By now I am sure all of you have read the news related to Dubai’s announcement last week that they have requested their debt repayments to be suspended for six months in order to restructure Dubai World. I think it is useful to understand the structure of Dubai World. That will help explain their actions and provide an understanding that this activity is a concern but not the end of Dubai.

Dubai World is a large holding company, wholly owned by the city-state's government. It has interests in real estate, transportation, logistics and natural resources around the world. The following is a list of its companies:

Nakheel a developer of residential, retail, commercial and leisure real estate in UAE and around the world

Limitless is another a real estate developer

Leisurecorp is a golf company whose portfolio includes the Chris Evert Tennis Centers and the Jumeirah Golf Estates

DP World is one of the largest marine terminal operators in the world. It had 49 terminals and 12 new developments across 31 countries

Economic Zones World, a company that develops and manages real estate. Its flagship company is the Jebel Ali Free Zone

In the financial sector, Dubai World owns Istithmar, an alternative investment house. It acquired Barneys New York, the luxury specialty retailer, in 2007. Istithmar's equity investment exceeds $2.6 billion across markets ranging from North America to the Far East.

Dubai Multi Commodities Centre, a subsidiary of Dubai World, is a market place for gold, diamonds, steel, base metals, tea and other commodities.

In the maritime industry, Drydocks World is an international player in ship repair, conversion, new building and other marine-related activities.

Dubai Maritime City is the first ever purpose-built hub for maritime business and commerce. It's located on a man-made peninsula between Port Rashid and the Dubai Dry Docks in the Arabian Gulf.

Dubai Natural Resources World was created as a business unit of Dubai World in 2008. It invests in natural resources, including energy, mining and metals, and agriculture. For example, the company has a joint venture in the oil and gas sector in both Russia and Nigeria.

Across these industries and companies Dubai World has borrowed $60 Billion. DP world is the only company that is not asking for a repayment holiday. It will continue to service the payments on its $18B loan. Below is a chart that summarises the which countries and banks have the most exposure to the UAE.



large amounts of money from the West have been invested into the UAE; interestingly, not all that money was invested in the UAE. When you review the companies that operate under the Dubai World holding company you can quickly ascertain that significant amounts of the borrowed money was invested outside of Dubai. It is also, demonstrates that the issues affecting Dubai World are not isolated to Dubai. Those investments in London, New York and Las Vegas were made during the peak price of real estate. The combination of the recession and the financial crisis has caused the value of Dubai Worlds external investments to under-perform and significantly decrease in value. This created a confluence of risk exposure in the property industry. This is not new information.

The bursting of the property market is not new and the situation at Dubai World has been well documented over the past 9 months. During the past 9 months Dubai World has refused to sell these acquired assets cheaply resulting in the company asking for a 6 month holiday. This time would then be used by the company to restructure and re-negotiate the company and their creditors. I expect the restructuring is to focus on property and foreign investments which have been the worst hit by the economic crisis.

The restructuring of the US$60-billion of debt at the Emirate’s core holding company will be the largest and toughest ever in the Gulf region. The few precedents are not encouraging for those who funded Dubai but the appointment of Deloitte’s partner Aiden Birkett as Dubai World’s new restructuring chief demonstrates that the Emirate understands the importance of an orderly process to work with the creditors. In the past the regions laws have been unfriendly to creditors. It is almost impossible to seize collateral. Courts in the region have consistently rejected claims by lenders to Kuwait Global Investment and Investment Dar which defaulted at the start of the year. The final restructuring solution was relatively simple. Both entitles committed to a repayment plan to their creditors that pushed out the maturities by 5 years. Unfortunately, the restructuring of Dubai World will not be as simple because its size, complexities and global interdependencies.

In our estimation the policy of mutually assured destruction will resolve this situation. The neither the creditors nor the debtors want default. Default for Dubai means the end of their vision and default for the creditors mean they are unlikely to receive any payments or assets in the near future. This result would surely reignite a financial crisis based on solvency not liquidity that neither party can afford. We do not stand alone on this assessment.

In the world of investment banking many people are shocked. “This came as a big shock,” said Fahd Iqbal, an analyst at EFG-Hermes, an investment bank focused on the Middle East. Although Mr. Iqbal said he held to the view that Dubai in the end would avoid default, he acknowledged that the measure had severely rattled confidence in Dubai. “One of the main issues now is of credibility and the potential impact on future fund-raising, which could have knock-on effects on building and infrastructure plans for Dubai and the United Arab Emirates,” he said.

The summary effect of last week’s announcement will not be known for months. The restructuring of the company began weeks ago with leaders of losing their jobs.

what is certain is that the initial news of the delay was poorly communicated and over-sensualised. Beginning on Wednesday the information spiralled out of control trigging vast sell offs in the world’s major stock markets. By Friday the talk of crisis cooled and the international media’s understanding of the issue and its interdependence softened. My expectation is that the debt holders will negotiate with Dubai World in an orderly fashion with some losers, few winners and a sounder more transparent and stable Dubai World operating in the future.