Dubai World may be forced into a fire sale of assets

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The Government of Dubai said on Wednesday that it was seeking a standstill on debt repayments for Dubai World, the vast conglomerate that bought P&O (minus the American ports) for £3.9 billion in 2006.

Dubai World has liabilities of $60 billion (£36 billion) and the standstill announcement, made just before most of the Arab world stopped work for the Eid religious festival, has stunned stock and credit markets.

The standstill raises the possibility that Dubai World could default on its debt. The fear in Western markets is that banks risk losing billions, causing more paralysis in the lending markets. Dubai World’s difficulties also raise the prospect that it may be forced into a fire sale of its assets, which include some famous names in the UK. Leisurecorp, one of the many subdivisions within Dubai World, bought Turnberry, the golf course that hosted this year’s Open Championship, for £55 million last year. It also owns the Chris Evert tennis centres and more than 200 golf courses across the US — all assets that could be sold quickly to help to repay debt back home.

Dubai World’s Istithmar investment fund has $3.5 billion in businesses as diverse as Irish textbook publishers and aerospace companies. Last year Istithmar also bought a 20 per cent stake in Cirque du Soleil and the Canadian circus performers have since established a permanent base in Dubai.

In the less glamorous world of ports, DP World became the third-largest operator globally after its acquisition of P&O. It owns Dubai’s Jebel Ali port and various other container terminals around the world.

In Britain DP World operates container terminals at Tilbury, near London, and Southampton, and is building a port called London Gateway. Many of the goods that are imported into Europe are, therefore, transferred through ports owned or operated by Dubai — the source of US concern when the P&O deal was struck. The Arabian group bowed to pressure after buying P&O and sold the American ports to another company. Dubai World yesterday ring-fenced DP World from the rest of the company’s debts. This was seen as an attempt to protect the profitable ports division from potential creditors.

It is Nakheel, Dubai World’s property developer, that has been causing the difficulties. The company, which built the Palm Islands in the Gulf, was due to repay a $4 billion Islamic bond on December 14. Most investors had assumed that there would be no difficulty doing so as Dubai World, the Government of Dubai and Sheikh Mohammed bin Rashid Al Maktoum, Dubai’s billionaire ruler, were assumed to be supporting the developer. It now appears that nobody has the money to repay or refinance the bond and so the other $56 billion of Dubai World’s liabilities are also at risk.

This triggered a run on international bank stocks as investors worried about their exposure to Dubai World, which accounts for nearly three quarters of Dubai’s state debt. Falling share prices wiped £14 billion off the UK banking sector alone.

Credit Suisse has estimated that European banks could have €40 billion (£36 billion) in loans to Dubai and much of this could be at risk if the Gulf emirate defaults. Banks including HSBC and Royal Bank of Scotland have helped to finance Dubai’s acquisitions and are now on the hook if the state cannot repay its debts.

Dubai enjoyed a bubble that made the boom years in the UK seem like postwar rationing. But the boom was built on debt and when credit markets tightened and the emirate’s growth slowed the property bubble burst. Prices have fallen by up to 60 per cent and more than 400 construction projects worth more than $300 billion have been shut down or postponed.

Many expatriates facing negative equity and ballooning credit card bills have skipped the country rather than face debtors’ prison and Dubai’s reputation has taken a battering.

If Dubai is forced to raise money to meet its debt repayments, the impact will be felt far wider than Cirque du Soleil and Turnberry golf course.

In recent years, the various investment companies owned by Sheikh Mohammed and the Government of Dubai have been buying up numerous Western assets. Dubai International Capital, the $12 billion sovereign wealth fund, bought Travelodge, the budget hotel chain. It also has a 16 per cent stake in Merlin Entertainments, which owns the London Eye, Madame Tussauds, Legoland and Thorpe Park.

Sheikh Ahmed bin Saeed Al-Maktoum, of Dubai’s Supreme Fiscal Committee, said that the Government acted in full knowledge of how the markets would react and that further information would be given next week.