A return to the fold

Posted on May 19, 2011


Dubai Bank. Nakheel. Two corporate entities that are now going to be owned by the Dubai Government. What’s behind the private to public shift?

The Dubai Government has decided to take full control of Dubai Bank, in order to keep the bank afloat and to protect deposit holders. Before the announcement, Dubai Bank was 70% owned by Dubai Holding and 30% by Emaar Properties. Emaar has said that it will write off its investment in Dubai Bank in the second quarter of 2011.

It can afford to take the hit. The value of Emaar’s investment in Dubai Bank at the end of the first quarter stood at about AED172 million or about 0.3% of the company’s assets and 0.56% of its equity.

It’s clear that the Dubai Government is unwilling to let anything tarnish its reputation as a business hub ever again. It is willing, and, importantly, able, to take whatever steps necessary to ensure a bank does not fail. This is not just another property developer – it is a significant player in the financial services sector. And its new owner has said – without giving details – that it will recapitalize the bank.

According to Dubai Bank’s 2009 annual report, the last available, it posted a AED291 million loss, and disclosed that 47% of its AED14.1 billion loan book was exposed to its top five borrowers.

A lot of the exposure was to the Dubai Holding conglomerate, which is in the process of restructuring its own debt obligations, estimated at around USD12 billion. It will be interesting to see how Dubai Bank’s exposure will be handled, given the ownership patterns of the bank and its creditor.

What is quite heartening, however, is that the Dubai Government continues to take steps to ensure global perception of the emirate remains untarred going forward. There is also the determination to bring back the principles of empire-building once inherent in all business activity in Dubai, but lost or forsaken in the massive upsurge of economic activity in the past decade.

The Dubai Government is right – this may be a good time to take a step back and reassess the values that business is built on.

This is probably the guiding principle behind the news that developer Nakheel too will become a government-owned entity by June.

Nakheel got into financial trouble in late 2009 after being hit hard by the fallout from the global financial crisis, which saw housing prices in Dubai slump and the real-estate bubble burst. The developer ramped up billions of dollars worth of debt during years of spending on some of the world’s most extravagant real-estate projects such as Dubai’s palm tree-shaped artificial islands.

Last year, Nakheel started a USD10.5 billion debt restructuring and in March 2010 secured about USD8 billion of fresh funds from the Dubai Financial Support Fund to fund operations and settle liabilities. The DFSF also agreed to convert USD1.2 billion debt into equity.

The Nakheel and Dubai Bank takeovers by the Dubai Government seem to be part of a consolidation effort intended to strengthen the weaker entities with massive debt overhangs while at the same time re-injecting some much-needed value propositions into Dubai business.

What follows from that could involve a new set of mergers and acquisitions activity, as the strengthened entities are brought back into play.

Posted in: Corporate