Brad Pitt and David Beckham are thought to be among those caught up in Dubai’s latest credit squeeze, as developer Nakheel and its state-owned parent company Dubai World have asked creditors for a six-month “standstill” on debt repayments totalling US$59 billion.
Just two hours after announcing it had raised $5bn from two Abu Dhabi banks, the department of finance asked for a standstill until May 30 on all financing to Dubai World and Nakheel, which is due to pay back $4bn on a bond on December 14.
The government has also called in accountants Deloitte to advise on restructuring the business. In a brief statement, it said the restructuring would be “designed to address financial obligations and improve efficiency for the future”.
Dubai World has the driving force behind the emirate’s rapid expansion, including the Palm Jumeirah and the World Islands. But now the fear is that it will be unable to continue with the Palm Jumeirah, leaving one of Dubai’s landmark developments a construction site.
News of the suspension is the clearest sign yet that the emirate might no longer meet its obligations.
The emirate is struggling with a debt burden of $80 billion as it embarks upon the biggest construction drive in history. It has been forced twice to approach its neighbour in Abu Dhabi for funds. The federal Government has approved $15 billion in bonds and more is expected to follow if Dubai’s state-owned businesses are to survive until an economic turnaround.
However the cost of insuring Abu Dhabi’s debt against default rose over a third on the news of Nakheel’s latest default.
When the 2,000 villas and townhouses on the Palm went on sale in 2002, they sold out within a month. Brad Pitt and Angelina Jolie and the Beckhams were among those believed to have snapped up homes as Dubai became poised to be the world’s number one playground for the rich and famous.
Several English footballers, passing en route to the World Cup in Japan and Korea, also bought properties worth over £1 million. Purchasers included Michael Owen, David James, Joe Cole and Kieron Dyer. Cole was one of the few who got out in time, selling his villa for about £2.1 million last summer, just before Dubai’s property bubble burst.
The Dubai government has done its best to gloss over the crash, claiming recently that the population would rise this year by 400,000, in contrast to independent estimates, which predict a sharp fall.
Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum has consolidated his hold on the debt-laden emirate, downgrading powerful figures behind the construction bubble. Last week he sacked the governor of the Dubai International Financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into a Middle East finance hub. A day earlier, he dropped Mohammad al-Gergawi, Sultan Ahmed Bin Sulayem and Mohammed Ali Alabbar from the board of Dubai’s main holding company, the Investment Corporation of Dubai. The three were at the forefront of a construction drive that began in 2002.
However some parts of the Dubai World conglomerate remain strong, in particular DP World, the third-largest international ports operator, which bought P&O in 2006. Those parts of the business founded on the property boom, and Nakheel in particular, are likely to continue to struggle until the property market recovers.