DUBAI (Reuters) – Dubai’s debts have always been a mystery to investors, but since the coronavirus pandemic hit its economy things have become more murky, some say.

FILE PHOTO: View of Burj Khalifa, the tallest building in Business Bay area in Dubai, UAE July 8, 2018. Photo taken July 8, 2018. REUTERS / Satish Kumar

In the past 12 months, two companies with ties to the Dubai government and its leader, respectively, have said they will not pay off hundreds of millions of dollars in debt, a rare step in the Dubai business hub. Middle East, where debts are typically renegotiated and state support is often taken to be implied.

One of the companies, Dubai Holding, the investment vehicle of Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, told creditors that it would not repay a $ 1.2 billion loan owed by its subsidiary Dubai Holding Investments Group and was ready to continue liquidation for the unit, according to a source and a document sent to investors in December and reviewed by Reuters.

The second company, state-owned real estate developer Limitless, told creditors last March that it was unable to repay a loan worth around $ 1.2 billion, according to a document from the company consulted by Reuters. He has since sought to restructure the debt.

Dubai Holding, which owns $ 35 billion in property and hospitality assets and stakes, declined to comment on its subsidiary’s debts and other units’ repayment plans. A Limitless spokeswoman told Reuters its restructuring talks with lenders were continuing but did not comment further. The company’s creditors included Dubai banks such as Emirates NBD, Mashreqbank, and Dubai Islamic Bank. They declined to comment.

Actions by Dubai Holding and Limitless have weakened the assumption that state support is obvious, according to investors, prompting some creditors to reassess their appetites and exposure to Dubai-linked debt.

With tens of billions of dollars to repay over the next few years, some lenders are selling off their exposures or making provisions for future losses, three banking sources told Reuters.

The price of Limitless debt has fallen sharply in the secondary market, according to price sheets reviewed by Reuters. The price of Islamic bonds issued by real estate company Meraas, which was incorporated into Dubai Holding last year, has fallen steadily this year, according to data from Refinitiv.

Dependent on trade and tourism, Dubai’s economy has collapsed under the pressure of the pandemic and low oil prices. Paying out to support so-called government-related entities (GREs) would be an additional burden on public funds.

“The recent defaults have highlighted long-standing concerns about strong leverage from the public and private sectors in a context of weak growth and a very weak real estate market characterized by chronic overcapacity,” said Cedric Berry, analyst at Fitch.

“In itself, a more limited support policy is good for government finances and solvency. However, the transparency of GRE balance sheets is limited and the difficult economic environment has increased the risk that some entities will still need financial support, thus putting pressure on public finances.

The Dubai media office did not respond to Reuters inquiries about Dubai’s indebtedness, Dubai Holding’s exposures, or the city-state’s plans to tackle the responsibilities of state entities.

The UAE Central Bank, which asked if it encourages banks to set aside provisions for Dubai’s outstanding debt, declined to comment.

“A DIFFICULT LINE TO PULL”

In the case of Limitless and Dubai Holding Investments Group, neither the State nor Dubai Holding had a contractual obligation to pay creditors.

Dubai Holding was only responsible for the interest payments on the $ 1.2 billion loan, and when it matured it told creditors it was “ready to pursue an insolvent liquidation in the absence of possible alternative ”, showed a document sent to investors in December.

The Dubai government explained its approach to ERGs in the prospectus of a rare public sale of sovereign debt last year. The sheikh said that if these companies were unable to meet their debts, the government could, “at its sole discretion, decide to provide whatever support it deems appropriate.”

But some investors were assuming there was an implicit government guarantee, two bankers said, a sentiment reinforced by Dubai’s support for Emirates Group, the state-owned airline, during the coronavirus crisis.

The flag bearer received an equity infusion of $ 2 billion from the state last year. A spokeswoman for the Emirates told Reuters that none of her debts are guaranteed by the government or by the Investment Corporation of Dubai, its sovereign wealth fund.

Confusion among investors has been compounded by the fragmentation of Dubai’s debt. Some report to the government, others to its sovereign wealth fund and others to the aegis of Dubai Holding, the investment vehicle of the sovereign of Dubai – a major force in the development of the local economy.

“It comes down to the same old argument, where does the private ruler end and where the emirate’s obligations begin. When you talk about an absolute monarchy, it’s a hard line to draw, ”said a banker from a Dubai lender.

Some of the debts owed by Limitless, the real estate developer, were trading at 20 cents to the dollar in December, down from 30 cents a few months earlier, according to secondary loan price sheets reviewed by Reuters.

Banks’ provisions for bad and bad debts in the UAE stood at nearly $ 42 billion in November last year, up from $ 36 billion at the end of 2019, according to central bank data.

Non-performing loans are expected to account for 7.6% of total loans in 2020, up from 6.5% a year earlier, the Institute of International Finance estimated.

ABU DHABI

Due to the lack of statistics, it is difficult to get a complete picture of Dubai’s financial situation. Its sovereign bonds are not rated by credit rating agencies and the city-state has mainly used private placements and bilateral loans to raise capital.

The government said in August that its debt level was equivalent to around 28% of 2019 gross domestic product, but that figure stands at over 100% of GDP, according to estimates by research firms and rating agencies. , if the debt raised by the GRE is also taken into consideration.

In its bond prospectus last year, the Dubai government said it had no official GRE debt estimate.

London-based Capital Economics estimated that by the end of 2024, Dubai’s $ 38 billion GRE debt must be repaid, much of it in 2023.

Most of the debt dates back to the 2008-09 financial crisis. At the time, oil-rich Abu Dhabi granted Dubai a bailout by helping its neighbor support its state-controlled businesses. The debts were renegotiated and extended.

This time, no help was provided.

Abu Dhabi and Dubai were in talks last year to support Dubai’s economy by linking assets in the two emirates, sources told Reuters at the time. Dubai denied the report.

Abu Dhabi did not respond to a request for comment.

According to traders, the perception that Abu Dhabi would support Dubai if necessary is factored into the price of Dubai’s sovereign debt.

Bonds sold by Dubai last year which are due to mature in 2050 are currently trading at a premium of just over 1 percentage point to Abu Dhabi paper with the same maturity, although Abu Dhabi have a higher credit rating and much greater financial wealth.

“Dubai enjoys the perceived support of Abu Dhabi, which remains an extremely strong credit, and may choose to provide support if needed,” said Richard Briggs, chief investment officer at GAM.

($ 1 = 3.6728 UAE dirhams)

Additional reports by Saeed Azhar; Editing by Carmel Crimmins