$20b roll-over a major boost for Dubai finances

The agreement for the roll-over of $20 billion debt between Abu Dhabi and Dubai is expected to help Dubai refinance some of the other upcoming debt maturities with confidence, which depended a lot on the successful resolution of repayments owed to Abu Dhabi government and the UAE central bank, and continue to spend heavily on the ongoing infrastructure development.

Dubai has already approached creditors for a waiver of the due repayments on two upcoming maturities and the new development is expected to strengthen its case to successfully negotiate delicate turns lying ahead in 2015 through a combination of internal cash reserves, asset sales and refinancing.

Two important preconditions for this are supposed to include a positive global credit outlook and liquidity along with the successful resolution of the debt owed to Abu Dhabi. To that extent, yesterday’s news is a major boost for Dubai.

It was the request for a temporary freeze on repayment for six months by Dubai World that precipitated the Dubai financial crisis in 2008, shocking credit markets and raised Dubai’s credit swap rates to unprecedented level.

The two Dubai government related entities seeking waiver of repayment this time around include Limitless and DP World.

Limitless, a major government related entity in the Dubai Inc, is understood to have approached lenders with a waiver request for the first amortization payment of $0.4 billion due in December 2014 under its 2012 debt restructuring agreement of a $1.2 billion loan. This need for some extra time has been caused by delays to go ahead with planned asset sales.

Similarly, Dubai World has requested proposals to manage $4.4 billion in loans maturing in March 2015 and reorganize its $10 billion repayment due in March 2018 amid slow progress on asset sales. The annual creditor meeting in April is likely to provide management with an opportunity to update its strategy.

Yesterday’s agreement, which was keenly awaited by the credit markets, relates to the refinancing of $20 billion of debt that was extended to the Dubai government as emergency aid during its financial crisis and comes due this year. The debt is being rolled over for five years at a 1 percent annual interest rate, WAM said in an official statement.

The roll-over covers a $10 billion, five-year loan which was offered to Dubai by the Abu Dhabi government through two state-owned banks, and $10 billion of five-year bonds which Dubai issued to the UAE central bank.

The International Monetary Fund estimated in January that Dubai and its GREs faced about $78 billion of maturing debt between 2014 and 2017; this month’s agreement takes care of more than a quarter of it.