Dubai's rulers yesterday bailed out Dubai World, the debt-ridden state-owned conglomerate which caused global investor panic last November when it asked for more time to repay $4bn (£3bn) worth of bonds.
The $9.5bn package was welcomed by the market as the Dubai bond prices surged. Traded debt in Nakheel, Dubai World's property arm which initially sparked the panic, jumped by 45 per cent after investors were promised that lenders would be fully repaid. Nakheel, the group responsible for the ostentatious palm-shaped islands that have become symbols of the Emirates' boundless ambition, now has two bonds outstanding, worth $1.73bn.
Dubai World rocked global financial markets when it asked lenders for a six-month moratorium on $4bn of repayments due a month later. The request came on the eve of Eid al-Fitr, the three-day holiday, leaving Western lenders in a state of flux. Yesterday's bailout vindicates those who argued that Dubai would not be allowed to fail.
"This proposal represents the best possible solution for all stakeholders," said Aiden Birkett, Dubai World's chief restructuring officer. "It follows extensive discussions with our creditors, a thorough review of Dubai World's businesses and significant support from the [Dubai] government. It offers the company a strong future and the opportunity to maximise the value of its assets over the medium to long term."
The deal will see the government- backed Dubai Financial Support Fund swap $8.9bn worth of borrowings, representing 38 per cent of Dubai World total debt, into equity. Dubai World's bank lenders will be fully repaid with the proceeds of two new securities that will have five- and eight-year maturities.
The deal is subject to creditor approval, but was greeted warmly yesterday. "This is a major sentiment boost," said Haissam Arabi, the chief executive of Gulfmena Alternative Investments. "It shows there is a concrete plan and that Dubai is fully aware of the situation, that it's proactive and coming up with solutions."
Dubai World gorged itself on the debt markets in the years leading up to the financial crisis. However, when lenders began imposing higher charges in the wake of the collapse of Lehman Brothers, Dubai World found itself unable to refinance its borrowings.
Standard Chartered, the British bank with the biggest exposure to Dubai, refused to comment yesterday.
Western analysts also welcomed the move: "It was good that Dubai World held pre-consultations with creditors before making the options public. This is an improvement on previous poor communication of the stand-still announcement itself," said Jan Randolph, of IHS Global Insight.