Dubai Gets Aid to Pay Off Debt

By STEFANIA BIANCHI DUBAI—Dubai said Monday that it has received $10 billion in financing from Abu Dhabi, which will pay part of the debt held by conglomerate Dubai World and its property unit Nakheel. Out of this, $4.1 billion will be used to repay Nakheel's Islamic bond, or sukuk, that matures Monday. The remainder of the funds will be used to finance Dubai World's needs up until the end of April 2010. "We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," said Sheik Ahmed bin Saaed al-Maktoum, chairman of the Dubai Supreme Fiscal Committee, in a statement. Dubai rocked world markets in late November when it requested a freeze on debt payments by Dubai World in order to restructure the conglomerate. Nakheel's bond had been seen by many as a litmus test for Dubai's ability to repay more than $80 billion of government and corporate debt. "I think Abu Dhabi saw the adverse market reaction to Nakheel debt restructuring news play out over several days and perhaps decided they had seen enough," said Saud Masud, senior real-estate analyst at UBS AG. Talk that Nakheel could reach a positive outcome helped boost shares in Dubai on Sunday. The Dubai Financial Market's main index closed up 3.3% at 1695.35, extending Thursday's 7% rally. However, the benchmark is still down about 19% since Dubai World requested the debt freeze. "This is very positive news, and will be welcomed relief to bondholders in particular. We are expecting a strong positive reaction to [United Arab Emirates] and regional markets," said Ali Khan, managing director at Arqaam Capital. In its statement, Dubai said it will focus on addressing the concerns of Dubai World's creditors and will start discussions with creditors and contractors shortly. Getting fresh cash from Abu Dhabi to alleviate some of the debt burden of Dubai World and its subsidiaries is a "great step forward for Dubai, the U.A.E. and the region," said Faisal Ghori at ME Ventures. "It assuages investors' concerns for the solvency of Dubai World." What now remains to be seen is how Dubai World, and the government of Dubai will restructure their respective remaining liabilities, he said. "It also makes clear—to some extent—that Abu Dhabi will support Dubai in its pending liabilities." Dubai's government announced a bankruptcy framework Monday in case Dubai World can't reach agreement with creditors to restructure $26 billion of the conglomerate's debts. An adviser close to the Dubai government told Zawya Dow Jones that "if they want to use it to protect the assets of the company they can." A copy of the legislation, known as the "reorganization law" will be made available Monday. Nakheel's bond matures Monday, but a two-week grace period allows the issuer until Dec. 28 to repay. Nakheel said Monday the repayment of the sukuk would be made within 14 days. If Nakheel has failed to pay by then, bondholders will be entitled to start legal proceedings. Dubai World last week began talks with banks to restructure $26 billion of debt, including the bond. "There is talk in the market that a deal, which is acceptable to all parties, could be reached," said Mohammad Ali Yasin, managing director of brokerage firm Shuaa Securities, before Monday's announcement. Nakheel, which last week posted a first-half loss of 13.4 billion dirhams ($3.65 billion), said in its financial statement that "whilst the management and shareholders remain optimistic, the outcome of such a request cannot currently be determined." Some analysts had said the Dubai government's silence on the issue since the debt-freeze request on Nov. 25 prompted concerns an agreement was unlikely. Dubai's $10 billion injection from Abu Dhabi may have been dictated by market pressure, said UBS's Mr. Masud. "While it is a big relief in the short term it does not address systemic risks and other liabilities still outstanding." — Tim Falconer and Mirna Sleiman contributed to this article.