Jitters reappear over Dubai’s finances as ability to resolve debt woes remains murky

Dubai debt fears resurface as questions linger

DUBAI, United Arab Emirates — As world markets warily eye Greece’s financial crisis, investors are once again focusing on unresolved questions surrounding how deeply indebted Dubai will pay its bills.

In one indication of the re-emerging concerns, Morgan Stanley said the cost to insure against a Dubai default this week shot to the level it was at the peak of the city-state’s debt crisis in November, before neighboring Abu Dhabi pumped in emergency bailout funds.

A major cause for concern is the lack of clear information since the sheikdom shocked global markets late last year with plans to restructure its chief conglomerate Dubai World and delay repaying $26 billion in debt. Talks with creditors, which include big international banks such as HSBC and Standard Chartered, are ongoing.

“The situation is still very fluid and a number of questions remain unanswered,” Morgan Stanley analyst Mohamed Jaber said in a report Monday, noting the recent spike in premiums paid for protection against a Dubai default. “The lack of transparency … has contributed to the increase in market volatility.”

It has also given the rumor mill plenty of grist. There are oft-repeated tales of the emirate’s multibillion-dollar manmade islands sinking into the sea — a claim authorities emphatically deny — and of trophy assets such as the storied Queen Elizabeth 2 cruise liner being shopped around at firesale prices.

The emirate’s elite bristle at such reports. Dubai’s ruler has repeatedly blamed his sheikdom’s tarnished image on a foreign media out to embarrass the emirate.

But the unanswered questions about Dubai’s debt are growing tougher to ignore.

Jitters returned to the forefront this week when Dow Jones reported that Dubai’s government was pushing a plan that could pay Dubai World’s lenders just 60 cents on every dollar owed.

A Dubai government spokeswoman denied that any deal was on the table. She agreed to speak only on condition her name not be used, citing government policy.

“Neither the government nor the company have put forward any restructuring proposals to the lenders at this time,” she said, adding that the state and conglomerate were “operating within internationally accepted principles in order to ensure a fair and equitable process for all creditors.”

Those assurances may have tided investors over for now.

Dubai’s main stock market posted a modest gain of half a percentage point Tuesday, following a sharp slide earlier in the week.

Insurance against a default, measured using rates for financial instruments known as credit default swaps, grew about 1 percent cheaper by evening in Dubai Tuesday, according to figures from CMA DataVision.

Even so, Dubai ranks among the five sovereign issuers most at risk of default listed by the market data provider. Greece sits at number 10.

Worries about Europe’s debt are also putting fresh pressure on Dubai.

“The market is moving away from risky assets in the face of sovereign debt woes of Greece and weak countries on Europe’s periphery,” said Rachel Ziemba, an analyst at Roubini Global Economics who monitors Gulf economies. “This is infecting … Dubai. Although Abu Dhabi came to Dubai’s aid in 2009, it still has some major debt sustainability challenges.”

Meanwhile, the question of how Dubai will cover its debts remains.

Dubai has received $20 billion in emergency funds from its oil-rich neighbor Abu Dhabi, which also hosts the capital of the United Arab Emirates, a seven-state federation of which Dubai is part.

That money, said to be in the form of loans, was put into a “financial support fund” intended to prop up Dubai’s many state-linked companies, such as Dubai World and its troubled property development division Nakheel.

The Dubai spokeswoman said the fund has pumped more than $6.2 billion into Dubai World over the past year, and stands ready to inject “considerably more” into the company to cover general business costs and interest payments to creditors.

That state aid won’t be enough to cover all that Dubai and its network of state-linked companies owe. The total amount is unknown, but is at least above $80 billion.

Moody’s Investors Service estimates Dubai government-related companies owe up to $100 billion, with half that amount coming due in the next three years. The credit rating agency believes Dubai is preparing to sell off major holdings soon to pay its bills.

“Dubai in general will be hard pressed to avoid the stigma of a distressed asset sale,” Moody’s Senior Vice President Philipp Lotter said in a report.

Moody’s identified more than a dozen “potentially lucrative” investments owned by Dubai state-linked firms that could be sold. Those range from minority stakes in Las Vegas mainstays Cirque du Soleil and MGM Mirage to outright ownership of luxury retailer Barney’s New York and British hotel chain Travelodge.

Some of Dubai’s more modest holdings have already been sold, including real estate in London and New York. On Monday, Merlin Entertainments acknowledged that an investment company controlled by Dubai’s ruler had quietly cut its stake in the amusement park operator by nearly two-thirds last summer.

More high-profile assets could also go, particularly trophy purchases such as the QE2, which Dubai bought for about $100 million in 2007. It was slated to become a luxury hotel off one of Dubai’s manmade palm islands, but now languishes in a downtown port awaiting renovation.

A spokeswoman for Nakheel, which planned to refurbish the ocean liner, left the door open to a sale.

“There are a number of options being considered” for the ship to determine “which option will best maximize value of the vessel,” she said.