VZCZCXRO2618
PP RUEHDH RUEHDIR
DE RUEHDE #0530/01 3441405
ZNY CCCCC ZZH
P 101405Z DEC 09
FM AMCONSUL DUBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 6747
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUEHDE/AMCONSUL DUBAI 0047

C O N F I D E N T I A L SECTION 01 OF 03 DUBAI 000530 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR NEA/FO; NEA/ARP/BMCGOVERN; TREASURY FOR NATASHA 
ZAMECNIK 
 
E.O. 12958: DECL:  12/10/2019 
TAGS: ETRD KIPR EFIN ECON PREL AE
SUBJECT: DUBAI SOVEREIGN VERSUS COMMERCIAL DEBT 
 
REF: A. A) ABU DHABI 1114 
     ¶B. B) DUBAI 516 
     ¶C. C) DUBAI 491 
 
DUBAI 00000530  001.2 OF 003 
 
 
CLASSIFIED BY: Justin Siberell, Consul General. 
REASON: 1.4 (b), (d) 
1.(C) SUMMARY:  In the aftermath of the November 25 Dubai World 
debt restructuring announcement (Ref A), Government of Dubai 
officials have sought to differentiate sovereign debt - those 
guaranteed by the Emirate - from commercial debt subject to 
market terms.  In so doing, the Dubai government is determined 
to preserve sovereign assets by distancing the government from 
any obligation to repay debts incurred by Dubai's 
government-related "private" companies, like Dubai World.  The 
government is also determined to ensure that Nakheel "sukuk" 
holders, particularly foreign hedge funds, understand that the 
December sukuk (Islamic bond) is tied to a particular asset 
(land).  Default, therefore, should it occur, would not entitle 
holders of the sukuk, which matures December 14, to lay claim to 
other more-valuable Dubai World assets.  Negotiations with 
creditors to extend debt maturity deadlines are proceeding 
favorably for Dubai World, according to senior government 
officials.  They continue to stress their active interest in 
helping Dubai World manage its difficult restructuring effort, 
in part because of the Dubai government's role as a significant 
shareholder and also out of recognition that an orderly 
restructuring of Dubai World is in the best long-term interest 
of Dubai and the UAE.  END SUMMARY. 
 
 
 
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DUBAI GOVERNMENT NOT LIABLE FOR DUBAI WORLD 
------------------------------------------- 
 
 
 
¶2. (C) Dubai government officials have been publicly explaining 
Dubai World's unexpected November 25 announcement seeking a 
standstill on payments on its USD 26 billion debt by 
differentiating "commercial" debt from Dubai's sovereign (and 
therefore guaranteed) obligations (Ref B).  This effort seeks to 
disabuse investors of any notion that the Dubai government had 
ever been a guarantor of these debts as many investors had 
believed.  (Note: According to a recent Barclays report, Dubai 
sovereign and quasi sovereign debts that are publicly guaranteed 
total USD 17.6 billion.  The remaining USD 69.5 billion is 
thought not to be guaranteed by sovereign pledges and includes a 
substantial albeit undisclosed portion of Dubai World debts. 
End Note)  The list of sovereign and quasi-sovereign assets that 
the government would presumably guarantee include Emirates 
Airlines, Dubai Civil Aviation Authority, Dubai Electric and 
Water Authority, Dubai Aluminum Company, Dubai Ports World and 
Dubai Holding, Dubai Ruler Sheikh Mohammed Bin Rashid Al 
Maktoum's stable of personally owned assets. 
 
 
 
¶3. (C) In a December 8 meeting with Ambassador and Consul 
General, Mohamed Shaibani, Chief of the Dubai Ruler's Court, and 
the individual at the center of the government's attempts to 
deal with the debt crisis, said that the priority of the Dubai 
government was to "protect sovereign assets".  A clear line 
would be drawn between assets owned/backed by the government and 
those of the private, government-associated companies like Dubai 
World.  Similarly, Dubai Department of Finance Director General 
Abdul Rahman Al Saleh and Director of Funds Management Marwan 
Abedin told the Consul General and Econoff on December 6 that 
the government would continue to take an active interest in 
helping Dubai World manage its restructuring effort, but would 
not be liable for its debts.  In this regard, and in a possible 
foreshadowing of government intent, Shaibani pointed to USG 
support for companies viewed as critical to the long-term health 
of the U.S. economy, noting specifically the auto manufacturers. 
 Saleh held that investors "did not do their homework" to 
properly assess the risk of investing in Dubai World and 
Nakheel, despite the presence of explicit disclaimers in 
Nakheel's sukuk prospectus, he said. 
 
 
 
----------------------------------------- 
 
GOVERNMENT WILL MEET ITS DEBT OBLIGATIONS 
 
----------------------------------------- 
 
 
 
¶4. (C) At the same time, Al Saleh emphasized that the Dubai 
Government will honor its sovereign debts and has taken 
 
DUBAI 00000530  002.2 OF 003 
 
 
necessary steps to ensure it is in a position to meet all future 
obligations.  (Note:  The Government of Dubai successfully sold 
USD 1.9 billion in five year Islamic Sukuk bonds in November as 
part of a USD 6.5 billion bond program (Ref B).  The bond sale, 
although it preceded the Dubai World debt standstill 
announcement, was the biggest Sukuk sale from the Gulf region 
this year  End Note.)  Saleh insisted that all publicly 
guaranteed Dubai Government entities such as Dubai Civil 
Aviation Authority and Dubai Electric and Water Authority have 
the full protection of the Emirate's sovereign guarantee and 
that the government has sufficient revenue to meet those needs. 
Al Saleh did concede that in the short-term the Dubai Government 
will face difficulty in raising funds through capital markets, 
but remained optimistic about long-term fund-raising prospects 
(Comment: Saleh is exceedingly optimistic on this point in our 
view  End Comment.) 
 
 
 
¶5. (C) Al Saleh identified the government's recent payment of a 
USD 1 billion Dubai Civil Aviation Authority bond as proof that 
the Emirate was fiscally sound and on track to meeting its 
sovereign debt obligations.  Abedin noted that once the Dubai 
Government completed critical infrastructure projects such as 
the metro rail, government funds committed to this effort would 
be freed up and eventually would generate sufficient funds to 
help meet future debts and to fund future investment.  In 
response to the question where Dubai might find additional 
revenue to help service government obligations, Saleh said that 
Dubai would continue to advocate for a federal Value Added Tax 
(VAT) system.  Implementation of a UAE VAT was being discussed 
at senior levels of government, he said, but would hinge also on 
whether the UAE was prepared to move forward alone or only as 
part of a GCC-wide decision. 
 
 
 
--------------------------------- 
 
LOOMING DISPUTE OVER SUKUK TERMS? 
 
--------------------------------- 
 
 
 
¶6. (C) Shaibani told Ambassador and Consul General that Dubai 
World was having some success negotiating a restructuring of 
Nakheel's sukuk obligations with bank holders of that debt, in 
particular the Dubai-based banks most exposed to Dubai World 
debt.  (Note:  Numerous sources claim that roughly 75 percent of 
Dubai World's debt is held by UAE banks.  End note.)  Dubai 
World faced an aggressive community of sukuk holders within the 
hedge fund community, however, who were pushing for default in 
order to lay claim to Dubai World assets, he said.  Shaibani 
held that in this regard, the Nakheel sukuk was being confused 
by the hedge funds as an ordinary bond, when actually the terms 
of the sukuk were quite different.  The sukuk issuance was, by 
nature of its Islamic structure backed by an asset, in this case 
land (Nakheel's proposed Dubai Waterfront mega development near 
Jebel Ali port).  In the case of non-payment, holders could lay 
claim to the specific asset that backed the sukuk, but not other 
Dubai World or Nakheel assets (e.g., hotels or other property in 
the U.S.) (Comment: ForeQ ownership of land is highly 
contentious in the UAE.  It is hard to imagine the Dubai or UAE 
Federal governments allowing a hedge fund or other international 
beneficiaries of a Nakheel default, to actually take control of 
this particular asset  End Comment.) 
 
¶7. (C) Director of Funds Management Abedin claimed in the 
December 6 conversation with Consul General and Econoff that the 
sukuks issued by Nakheel were originally intended for a domestic 
investor class and not for foreign based investors.  Foreign 
investors "erroneously" assumed Dubai World's commercial debts 
would be backed by a sovereign guarantee rather than the 
specified assets that by definition underpin a sukuk issuance. 
(Comment:  Clearly, when Nakheel conceived of its sukuks, it did 
not plan for or expect to begin dealing with the hedge funds, 
and Dubai authorities continue to struggle to understand how to 
deal with that community.  Local fears have been stoked by press 
reports that hedge fund holders of the Nakheel sukuk are pushing 
for a default on the December 2009 sukuk in order to lay claim 
to assets spread throughout the Dubai, Inc. firmament.  One 
senior Emirati banker told Consul General that the "coup de 
grace" in terms of shame for Dubai would be a U.S.-based 
creditor successfully seizing an Emirates airlines plane or 
other recognizable Dubai asset as part of a Nakheel default  End 
Comment.) 
 
 
 
DUBAI 00000530  003.2 OF 003 
 
 
 
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MIGHT DUBAI WORLD PAY ON TIME AFTER ALL? 
 
---------------------------------------- 
 
 
 
¶8. (C) Accompanying the statements from Dubai officials 
differentiating between sovereign and private debt have been 
several hints that Dubai World may not go into technical default 
on its December USD 3.52 billion sukuk re-payment.  Shaibani 
indicated that Dubai World's negotiations with banks were 
proceeding well.  This was echoed in a December 9 conversation 
with Dubai Financial Market Executive Chairman Essa Kazim who 
told CG and Pol/Econ chief that international banks were 
reportedly coming to the table with Dubai World due to 
longer-term confidence in Dubai not shared or seen as relevant 
by the hedge fund-holders of short term paper.  Those with 
longer-term expectations in Dubai had an interest to help the 
companies restructure and renegotiate repayment terms, while the 
short-term holders had a greater interest in default in order to 
lay claim to assets, he said.  Finally, Finance Chief Al Saleh 
emphasized to CG and Econoff December 6 that the Dubai 
government would "support" Dubai World as it went through its 
restructuring.  DFM's Kazim sketched out a scenario whereby 
Dubai World successfully renegotiates extended terms on its 
large debt obligations with the local banks that reportedly hold 
75 percent of its debt, with the Dubai government later stepping 
in to cover the costs associated with buying up the short-term 
notes from the hedge fund community, possibly using the USD 5 
billion raised from Abu Dhabi in the days prior to the Dubai 
World standstill announcement. 
 
 
 
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COMMENT 
 
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¶9. (C) The Dubai government is determined to protect its 
sovereign holdings and those of the ruling Maktoum family. 
Second, it seeks to "ring fence" prized assets within the Dubai 
World and other government related entities portfolios while 
simultaneously seeking to renegotiate and extend debt maturity 
dates with the local and international banking community. 
Whether these steps will succeed in seeing the Emirate through 
the coming period without significant assistance from Abu Dhabi 
remains to be seen.  We still lack clear data on the 
government's ability to meet its own obligations, despite the 
assurances from its senior financial managers.  Certainly, 
markets are not yet convinced, as evidenced in significant 
market drops in the past several days of Dubai trading, and the 
credit downgrades of government bodies like the Dubai Water and 
Electricity Authority.  The recent appointment of outside 
restructuring experts is hoped to bring credibility to the 
restructuring of Dubai World, but still does not address the 
broader, and quite confused, mix of government and private 
liabilities.  The coming weeks should provide a clear signal of 
the success of the government's current strategy, once the 
Nakheel sukuk repayment deadline passes (December 14, but with a 
two-week grace built in).  END COMMENT 
SIBERELL