The Dubai debt saga

Dubai, the paradise of investors, has mired all markets across the globe with its debt restructuring plans. The emirate of Dubai has external debts of about $80 billion, out of which, nearly 75% is owned by Dubai World, its biggest holding company.

In something that may turn out to be the biggest sovereign default since Argentina in 2001, the Dubai government has asked the creditors of Dubai World and developer Nakheel group to accept a moratorium on debt that runs into billions of dollars until at least May 2010 because of the crisis triggered by real-estate slump. According to a statement issued by the Dubai Financial Support Fund, "Dubai World intends to ask all providers of financing to Dubai World and Nakheel to (agree to) a 'standstill’ and extend maturities until at least 30 May 2010.”
However, the government clarified that DP World, the world's fourth-largest port operator, and its debt would not be a part of the restructuring of Dubai World. As of August 2009, Dubai World, the conglomerate that spearheaded the emirate's breakneck growth, had some $59 billion in liabilities, while Nakheel Properties, the world’s biggest privately held real-estate company, is also due to pay off about $3.50 billion in maturing Islamic bonds in December 2009.
Dubai World is closely related to all government-linked companies, following its high rise in a short period. At the same time, the company is also closely associated with the huge debt that has followed.
Earlier, in August, Dubai World hired an advisory firm to help it explore options to improve the financial position of its US-based luxury chain unit Barneys New York.
According to a news report from Al Jazeera, the emirate accumulated its debt as it expanded into the banking and real-estate sectors before the global financial crisis dried up available financing.
"Restructuring its government-linked debts is now a top priority as the government seeks to assure a rebound for its trade, tourism and services-focused economy and recover from the precipitous property crash,” the Al Jazeera report said.
Even for Nakheel, the developer who built the famous Palm islands, it would be difficult to repay debts due next month. With work on many of Nakheel's high-profile properties either slowing down or completely stopped, it still remains to be seen from where it would get the funds, other than a government bail-out, to repay its $3.50 billion debt maturing next month.
Indian construction companies, like Nagarjuna Construction Ltd and Simplex Infrastructure, with exposure to Dubai could thus witness project cancellations, and delayed execution and payment timelines.
"We believe Dubai exposure has long been discounted in (various) valuations. Strong order inflows and now, attractive valuations make NCC a good pick in our view. The event-based correction also presents a good opportunity to enter into L&T and Voltas, who will be relatively unscathed by the developments in Dubai," said Religare Capital Markets Ltd in a note.
The financial crisis in Dubai may not impact remittances sent by Indian expatriates in the Gulf country back to their home nation. India gets nearly a quarter of its total remittances from the United Arab Emirates (UAE). "Remittances from expats didn't suffer during the period when the larger crisis was on. So whether this would have an impact in terms of employment, in terms of salaries and therefore in terms of remittances is somewhat unlikely," finance secretary Ashok Chawla told reporters in New Delhi.
Speaking with PTI, former RBI governor YV Reddy said, "On the basis of past evidence, the recent development in the Middle East should not have any serious impact on Indian remittances."
Although the debt problems in Dubai are related to the real-estate market, mostly driven by supply rather than demand, it may not lead to sovereign default. In this context, it would be necessary to observe whether the situation in Dubai remains confined to Dubai World and Nakheel or if it escalates into a full-blown sovereign default. -Yogesh Sapkale [email protected]
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    Shady IPO deals continue unabated

    Activities in the Indian IPO space have a fair share of greedy promoters and underhand dealings. Issues continue to be priced irrationally, partly because of a misplaced perception of future performance and investor interest, and partly to feed the egos of power-hungry promoters. Adding to this, the nexus between company promoters and merchant bankers to the issue makes the picture even murkier. In such a scenario, who would blame the retail investor for not taking interest in the primary markets?

    Retail investor response to recent IPOs has been tepid at best. These issues have been subscribed fully only through ‘discount deals’ with large institutional investors and merchant bankers, who demand a hefty discount of 30%-50% in order to help close the issue and soothe frayed nerves of panic-stricken promoters. This is one of the primary reasons explaining the mystery of IPOs listing at substantial discounts to the issue price. This may be just the tip of the iceberg, though, as other worrying trends are surfacing within the IPO arena. There are instances of promoters doling out cash to arm-twisting merchant bankers seeking upfront rewards for closing out under-subscribed issues. Other reports indicate merchant bankers applying in huge volumes to IPOs where investor response is muted, keeping promoters at their mercy till the last date of the book closure.

    Of the 16 IPOs that have come up so far in 2009, only six are trading above the issue price. Others have plunged steeply against the issue price. Den Networks, which listed on 24 November, closed at a discount of 16.36% to the issue price of Rs195. It is currently trading at nearly 20% below offer price. Although the offer was oversubscribed 1.04 times, retail portion was subscribed only 0.0963 times. Investor interest was also muted in the offers by Oil India, Raj Oil Mills and Globus Spirits. Others are struggling to provide positive returns despite being oversubscribed. Euro Multivision and Rishabhdev Technocable are currently trading roughly 61% and 47% respectively below their issue prices. Indiabulls Power, which attracted huge attention even from retail investors, is down 27% over its issue price. Globus Spirits, Adani Power and NHPC also suffer from the same fate.

    This IPO debacle has not gone unnoticed at various equity research firms, where some analysts are, for once, sounding off investors against putting money in IPOs of companies lacking enough credibility. Even companies with strong fundamentals are being scrutinised in greater depth. IPO price bands of Adani Power, Oil India and Raj Oil Mills were considered steep by some brokerage firms despite healthy prospects. Pipavav Shipyard IPO was actually assigned an ‘avoid’ rating in one of the research reports.

    Amidst all this, the government is drawing up blueprints for follow-on issues for PSUs. However, before the government decides to immerse its feet in choppy waters, it should have a closer look at the goings-on to avoid being taken for a ride by the investment banking community. 

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    9 years ago


    interesting article but the author has failed to highlight one of the basic problems:
    'aggressive' pricing.
    most ipos have settled down at their true value, post listing.

    Food inflation jumps to 15.6% as potato prices soar

    Food inflation shot up to 15.6% for the second week of November on the back of spiralling potato prices, which have more than doubled in the past year, reports PTI.

    Other essential items like pulses and onion rose by more than 25% in the wholesale market, government data on inflation for the week ended 14th November showed.
    "Food inflation is incredibly high...The drought has aggravated the situation and I expect the wholesale price-based inflation to rise to around 7% by March next year," said HDFC Bank economist Jyotinder Kaur.
    With inflationary pressure building up, the RBI in its next policy review may take steps to check easy money. "It is likely that RBI in its January policy might go for monetary tightening measures and raise the cash reserve ratio (CRR) or policy rates," Kaur said.
    According to the inflation data, potato prices rose by 111%, pulses by 35% and onion by 27% in the one-year period ending 14th November.
    Staple items like wheat and rice rose by 12% each during the period. Vegetable prices too continued to go up, registering a 12% rise during the same period. However, among fuels, petrol prices fell by 12%, cooking gas by 7% and diesel by 6%.
    Food inflation for the week ended 14th November was significantly higher even when compared on a weekly basis.
    Axis Bank economist Saugata Bhattacharya said the persistence of higher food prices is worrying. "I expect wholesale price inflation to rise between 7% and 8% by March-end," he said.
    Among other items, urad and poultry chicken prices rose by 15% each, eggs by 8%, moong by 6%, arhar by 5% and fruits & vegetables by 3%.
    Led by costlier food prices, wholesale inflation rose to 1.3% in October from 0.5% in the previous month. Inflation had remained in the negative for 13 straight months before trudging into positive territory in the first week of September at 0.1%.
    Among non-food articles, raw silk rose by 3% and fodder and groundnut seed by 2% each. Barley, however, fell by 2% and tobacco by 3%.
    The fuel index, on the other hand, remained unchanged at the previous week's level. The primary articles index rose by 1.2% on a weekly basis and by 11.04% on an annual basis.
    Yogesh Sapkale
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    10 years ago

    Good news

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