Feature

Stand and deliver: The state should answer to the people

by Rany Kassab, Zeina Loutfi & Ramsay G. Najjar
written by Rany Kassab, Zeina Loutfi & Ramsay G. Najjar

After more than five months of a political stalemate and relentless bickering between opposing politicians, the first government headed by Prime Minister Saad Hariri was sworn in last December, receiving a record-breaking vote of confidence from parliamentarians and signaling, one would hope, the beginning of a new phase for Lebanon.

But the Lebanese have become increasingly cynical vis-à-vis any notion that a change in names will actually lead to a change in governance. They have grown skeptical that a new government would actually present a policy statement reflecting political, social, economic and cultural dimensions.

Even when governments did go as far as to establish a “viable” and “realistic” policy statement, they seldom went the extra mile in actually implementing its clauses, creating somewhat of a schizophrenia between rhetoric and reality on the ground.

Discussing the cabinet’s policy statement in our “consensual democracy” has become a formality and an end in itself. The cabinet’s policy statement, the core of a democratic government’s agenda and its raison d’être, has been all but drained of its substance and essence, becoming simply a hollow package and a distant fleeting memory of a pledge for a better future.

Accountability, thus, is what has been missing in our part of the world. It is the root of democracy, and only by raising the level of our political maturity in demanding accountability from our elected officials can we move to a state of near perfect balance, in which citizens have both rights and responsibilities.

According to the American author Michael Armstrong, “The ancient Romans had a tradition: whenever one of their engineers constructed an arch, as the capstone was hoisted into place, the engineer assumed accountability for his work in the most profound way possible: he stood under the arch.”

Granted, this might be taking things to the extreme, but extreme measures might be the only cure left to our ailing democracy if we are to move from a tradition of electing officials based on family ties, personal interests or sectarian allegiances, to one of electing officials based on their competence, track record and capacity to “walk the talk.”

Accountability is certainly not a new concept. It has been around ever since the days of Socrates and Plato in ancient Greece. It was also one of the key offshoots of the French Revolution which, in 1794, established accountability of the government through the establishment of the national archives and the citizen’s right of access to government documents. Accountability is also a key pillar of the corporate world, whereby executives and company board members are primarily liable and accountable to their shareholders, but also to their stakeholders, and where companies are answerable to their customers and are penalized in case their products and services are perceived as not offering their “promised” value.

Therefore, what we need to do in our part of the world is to try to change mentalities and entrench the concept of accountability. Communication plays a central role in that.

Achieving the desired level of political and social “awakening” requires constant efforts to educate the general public on the intricacies of true citizenship, with what it requires in terms of rights and responsibilities, being accountable and holding elected officials accountable. Academics have a role to play on that level by pushing for the infusion of curricula in schools and universities centered on civic responsibility.

Members of the civil society, meanwhile, can positively influence public opinion (through media campaigns, publications, rallies, press conferences, meetings, viral online communication, etc.) while serving as watchdogs, sanctioning the government in case it goes off-track and fails to abide by its promises.

The media, as the fourth estate, has a paramount role and duty to exercise as well, in both educating the general public and disseminating the right messages on the need for a new social contract, but first and foremost in acting as guardian of the public interest and as “auditor” of the activities of the government. In a country that still prides itself as being a beacon of free press in the region, Lebanese media has an even greater responsibility to “keep the government in check”, ensuring that it implements the policies based on which it had gained the confidence of the people’s representatives.

While it has yet to live up to people’s expectations, the new Hariri government set a precedent in Lebanese history, in establishing a “National Priorities” agenda encompassing a series of concrete time-bound steps to be taken as part of the government’s short, medium, and long-term plans to tackle issues affecting Lebanese the most in their everyday life.

These priorities, owned by the people, should delineate the government’s course of action and its focus going forward. Our role, now, is to hold the government accountable on its ability to implement the “National Priorities” agenda. Only when we have exercized our legitimate rights a citizens can we as Lebanese truly start to claim that our democracy is safe and sound.

Rany Kassab, Zeina Loutfi & Ramsay G. Najjar S2C

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Society

Automotive opulence

by Executive Staff
written by Executive Staff

 

Cars, like people, come in all shapes and sizes. We find ourselves describing them in terms ordinarily reserved for humans: muscular, sophisticated, dependable, smart. Often personified by their own unique quirks and charms, metaphorically, at least, cars are a lot like those who drive them.

So what, then, is a supercar? Consider this analogy: there is man, and then there is Superman.

The man from Krypton is stronger, faster, smarter, and better-looking than his earthling cousins. He defies physics. He pushes the envelope in the realm of the possible. Even when he’s battling the forces of evil, his hair remains impeccably styled.

Compare an ordinary car to a supercar, and you see a similar contrast, with one additional feature: where Superman can fly with eagles, the soaring prices of supercars reach stratospheres all of their own.

Loss leader

The supercar market has traditionally been an exclusive niche, dominated by marques such as McLaren, Ferrari, Bentley and Bugatti. The supercar model cannot simply be viewed as a high-end product: in many cases, even the cars’ stratospheric price tags do not match the even higher costs of their design and manufacture. Companies never invest without expecting return. So what’s the selling power in an uneconomical but dead sexy set of wheels?

The simplest, most comprehensive answer is that supercars promote their brand. The supercar is all about image: it’s flashy, fast and hogs the public spotlight each time it breaks a new record for speed or handling. Manufacturers are even selective about who they sell to, since anyone driving a supercar will automatically lend their own star-power, if they have any, to the car’s image.

It might seem like a global economic crisis would be a good moment for the struggling auto industry to tone down its image, trade glitz and glamor for conservative spending, and shore itself up against the biggest shock to its system since the Great Depression.

If super wasn’t enough

Logic would suggest that as citizens are forced to tighten their budgets, they’d be looking for reliable cars at low costs, not a $1.5 million dreamboat.

In fact, the opposite has occurred. While the automotive industry tanks and big dealerships unload their wares on the public at dramatically lowered costs, the supercar industry is expanding. Not in terms of volume by brand, but in a widening of the niche itself. Dealers such as Nissan and Hyundai, who originally built their reputations on dependability and low cost, are now launching their own supercar prototypes, the Nissan GTR and the Hyundai Genesis Coupe, both priced in the hundreds of thousands of dollars.

Established supercar makers are finding their own ways to step up quality, coming out with models that take “super” to the next level: the Ferrari 430, for instance, already a supercar, was recently upgraded with the release of the 430 Scuderia, faster and more powerful than its progenitor. The Lamborghini LB 640 tells the same story.

We can speculate at length on why this may be. Perhaps the industry is fighting to retain consumer confidence, and see massive spending on unsellable products as a way to show that it has plenty of profits to throw around. Perhaps the world’s wealthiest, those who might actually be able to shell out for a Bentley, weren’t hit hard by the crisis, or aren’t willing to show it.

It is interesting to consider where the supercar market might go from here. A possibility is that the supercars of today, launched as prototypes to catch the media spotlight, will hit the roads as an affordable vehicle tomorrow. This was the case with the Chevy Cameo, initially launched as a custom model, but later mass produced for a larger market.

What can be certain is that, with new competition in the niche, we’re bound to see interesting developments in the future. If every major carmaker jumps on the supercar bandwagon, companies such as Bugatti and Ferrari will have no choice but to supersede their past achievements and take their products to a new level if they are to maintain their image as forerunners in automotive technology.

NADIM MEHANNA is an automotive engineer and has been a pioneer of motoring on Middle Eastern television since 1992 

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Finance

A spotlight on markets

by Annelle Sheline
written by Annelle Sheline

 

Crises purify markets,” pronounced Fadi Khalaf, the recently appointed secretary general of the Union of Arab Stock Exchanges (UASE) in his opening remarks to the organization’s first public meeting in Cairo in early December. With stock market heads trying to bolster each other’s confidence that the worst was over, the global economic crisis had never sounded more silver-lined.

Eleven days after Dubai World, the government-owned holding company, delayed its debt repayments in November and caused a massive drop in stock prices around the globe, Rashed al-Baloushi, deputy executive officer at the Abu Dhabi Securities Exchange said the bourse was “very optimistic about the future of [its] [Emirati] markets.”

Despite such statements intended to minimize the impact of the Dubai  World crisis, the fact that most Arab governments retain majority shares in their markets remains a critical factor in these economies’ ability to mitigate future crises.

The near default of Nakheel — the main real estate development arm of Dubai World — whose The World and Palm Island developments now symbolize the emirate’s excess, aroused much debate at the conference, as did speculations that Abu Dhabi might or might not take responsibility for bailing out its ostentatious neighbor.

Abu Dhabi announced in mid-December that it would lend Dubai $10 billion to cover part of the debt, essentially paying in full the matured Islamic bond and stabilizing Dubai as a whole.

Despite the lack of clarity on what would constitute the largest government default since Argentina had to undergo debt restructuring in 2001, the delegates’ mood remained aggressively confident. Reassurances abounded that markets had recovered from the Dubai scare and no lasting repercussions were expected.

“The first reaction was an overreaction,” declared Andre Went, the chief executive officer of the Qatar Stock Exchange (QSE).

What do Middle Eastern markets need?

In his opening remarks, the UASE’s Khalaf floated objectives for the delegates to pursue. Possibilities included a financial supervisory body for the Arab states and the establishment of a pan-Arab clearinghouse. Subsequent panels addressed the impact of the global crisis on Arab markets, market projections for 2010, greater integration and tougher regulation.

As Arab markets grow more complex and offer more diversified products, from derivatives to futures, off-market trading has risen in profile. The Secretary General of the World Federation of Exchanges, Thomas Krantz, cautioned against the increasing number of over-the-counter transactions that are conducted outside the regulation of a market or clearing house. Such non-exchange trading, he warned, would dry up liquidity that Arab markets desperately need to assuage fluctuations and, in addition, destroy price transparency set by an open market.

Turn the spinning wheel faster

Similar to the affiliation established between the Dubai Exchange and NASDAQ in 2005, Went announced a partnership between the QSE and NYSE Euronext. He recommended other Arab markets to focus on international alliances in order to “get the spinning wheel turning faster” — in other words, increase market velocity and diversify the range of products available, add central counterparty settlement netting, and lower barriers to membership in order to attract more initial public offerings, described by Ahmed Aweidah, CEO of the Palestine Securities Exchange, as “the lifeblood of exchanges.”

Massimo Capuano, the deputy chief executive of the London Stock Exchange Group and the CEO of the Borsa Italiana, offered a somber note, warning that the deeper impacts of the credit crunch may not yet have been fully felt.

“The World Bank and Arab governments must decrease the impact of a shrinking fiscal space on individuals, and close the feedback loop between real economies and financial systems,” he said. “They must develop internal markets that are able to absorb the effects of external factors. This was a crisis of the banking sector, not the financial sector as a whole.”

He reminded the audience that the crisis came within a context of an Eastward economic power shift, and that responses to the crisis should reflect awareness that Western economic centers are in decline.

Technological integration

Problems preventing the evolution and growth of Arab markets largely boil down to a justifiable lack of confidence in the security of investments. Short of imposing widespread and potentially market distorting regulations, a standardized technological system that allows regional integration and inter-border trading would permit markets to grow and stabilize.

The Chairman of Misr for Clearing, Settlement and Central Depository, Mohammed Abdel Salam, criticized Arab markets and clearinghouses for their many weaknesses, such as late delivery of payments and securities, a lack of transparency and a scarcity of information.

He recommended the adoption of standardized practices across Arab markets, such as immediate suspension of trading for defaulting brokers, enforcement of the 2007 G30 reforms and reinforcement of registered ownership. He urged the assimilation of all Arab markets onto one shared software hub, similar to the eight central securities depositories in Europe and Turkey now connected on the Link Up Markets.

Abdel Salam advocated that Arab markets “link technically if not legally,” laughing that as Arabs it was useless to attempt legal integration.

Mohammed Rashid al-Ballaa, chairman of Mubasher, a brokerage firm and e-financial services provider, put forward his company as the solution for the “multiple problems preventing Arab markets from working together.”

After Ballaa spoke, technological integration became the conference buzzword, as more stringent measures, such as a pan-Arab regulatory body or clearinghouse, proved too daunting or undesirable. Many delegates expressed support for adopting either Mubasher or a comparable system to integrate Arab stock exchanges’ software.

Market projections

The need for change in Arab investor culture became apparent as the conference wore on, from the current pool of short-term retail investors to long-term institutional investors. Saleh Nasser, the CEO of the Egyptian Society of Technical Analysts charted market data, using the Egyptian bourse, to demonstrate that long-term investors would have significantly higher profits than speculators.

Julien Nebenzahl, a board member of the Federation of Technical Analysts, used other market data to demonstrate the cyclical nature of the markets, suggesting that the “inventory cycle” had begun 10 months ago, and that the world was now in a stage of “consolidation.” He forecasted a new rally in prices until the middle of 2010.

Privatize Arab markets

Nebenzahl’s presentation and a dour warning from Essa Kazim, the chief executive officer of the Dubai Financial Market, may be the two strongest messages to have come out of the conference.

Kazim spoke from experience when calling for demutualization, and that “only a privately owned market can be sufficiently attuned to trends to respond appropriately.”

With most Middle Eastern governments still owning the majority of market shares — excluding Palestine — his grim pronouncement was met with both nods and stony faces.

Almost appearing to admonish his colleague from Dubai, the Abu Dhabi Stock Exchange’s Baloushi stated, “I believe the [Dubai] crisis is exaggerated. The money involved is not a huge amount. We need to preserve the institutions that make the economy appealing. It is worse when people relate the matter to the government. This is not appropriate.”

Abu Dhabi’s decision to bail out Dubai reflects the global trend of government intervention on an unprecedented scale, perhaps intended to silence criticisms from those who call for private companies to take over from government control.

At the UASE conference, the one purely governmental representative did not appear. Egyptian Minister of Investment Mohammed Mohieldin missed his scheduled address.

 Whether this reflects the belief that the UASE remains a dormant and largely ineffective body, or acknowledgement that perhaps the time has come for Arab governments to step back and allow the markets to handle themselves, remains to be seen and will be largely determined by what level of integration the UASE manages to accomplish.

 

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Finance

After the hubris

by Annelle Sheline
written by Annelle Sheline

 

At the Union of Arab Stock Exchanges (UASE) conference in Cairo last month, Executive spoke with leading figures from different bourses around the Arab world about the impact of the Dubai World debt crisis, as well as other pertinent issues and trends in regional financial markets. Here is a selection of their answers: 

E  Was Dubai World’s near default an isolated incident or a symptom of Dubai’s financial situation as a whole?

Ahmed Aweidah, chief executive officer of the Palestine Securities Exchange: The writing was on the wall for Dubai. Everyone knew that Dubai was built on the availability of cheap credit, so during the credit crunch it was obvious Dubai would have problems; but it won’t go bankrupt. Dubai is going through a needed correction. It still has the fundamentals — qualified people, excellent infrastructure, ports and trade — that will allow it to bounce back on a more modest scale, but no more of this ‘tallest skyscraper in the world’ business.

Huseyin Erkan, chairman of the Istanbul Stock Exchange and president of the Federation of Euro-Asian Stock Exchanges: [Dubai World] was not an isolated case. Dubai invested heavily in real estate and was heavily leveraged. Now Dubai World will undergo restructuring as the authorities examine its assets.

Andre Went, CEO of the Qatar Stock Exchange: We’d better hope it was an isolated incident.

Abdullah Almadhi, CEO of Rana Investment Co.: Dubai World’s near default was a result of dryness in the market. The ripple effect of Dubai on shallower markets is greater than it would have been on more liquid markets. With proper amounts of credit to pay back loans, this will be an isolated incident.

Rashed Al-Baloushi, deputy chief executive (DCE) of the Abu Dhabi Securities Exchange: The figures were surprising for the United Arab Emirates. Our growth, gross domestic product, clear strategy and clear vision are moving us toward constant improvement. I think Dubai World was isolated and I am a strong believer in the strength of the Middle East.

E  What will be the impact of Dubai World’s near default on the region in 2010?

Thomas Krantz, secretary general of the World Federation of Exchanges: I have no idea. Our only role as markets is to stay open, to assuage concerns. The last thing you ought to do is lock the door.

Erkan: Regardless, there is liquidity in the Middle East. Money stayed home and it has helped offset the effects of the crisis. [Mideast] markets were not as poorly affected; most of the effect was psychological.

Went:The impact on Qatar will be limited. The initial reaction was an overreaction; the market fell 8.3 percent, but recovered quickly and is again over 7,000 points. It is difficult to predict the regional impact of the Dubai crisis; it depends whether foreign investors view the Gulf Cooperation Council as an integrated region or as made up of individual countries.

Massimo Capuano, DCE of the London Stock Exchange Group and CEO of the Borsa Italiana: Devolution is important for general credibility. It is too early to tell if Dubai’s credibility as a whole is damaged, as we’re still waiting for the solution. Dubai remains the most important economy in the Gulf, so the other GCC countries will need to decide what they need to do.

Aweidah: Palestine benefitted from its isolation in both the financial crisis and the post Dubai World downturn. Our stability, low leverage [and] current [foreign direct investment] levels make us attractive to investors. In 2008, we only lost 16 percent. We were the best performers in 2008 and have recovered the most since. We’re up 13 percent now. Everyone said, ‘Oh god, this is a crisis.’ Palestine is in a permanent crisis; it’s nothing new for us.

E  Why is the UASE meeting now, a quarter century after it was first established?

Capuano: The UASE is seeking to establish a common ground among its members, so that it can achieve a harmonized evolution of its markets; this has happened in many regions. As in Europe, the markets were once fragmented; then with the implementation of the euro and the European Central Bank it began homogenizing. The Middle East benefits from having a common language in which to conduct business.

Almadhi: We need to make sure that regulators and market participants are in the same place. It is important to sit down face-to-face, to hear the different issues we face and the similarities of our situations, which can lead to unified policies in terms of regulation. If we met on a regular basis I think we’d see more positive results.

Ahmed Saleh al-Marhoun, director general of the Muscat Securities Market: It is not easy to get everyone to agree. But in a crisis, you have to talk together in order to solve it. The [UASE] has been in existence for over 20 years and recently appointed a full-time secretary general with the clear objective of implementing an agenda.

E  Is it time for a pan-Arab stock index?

Went:Making an index is easy. One already exists, in fact, the Morgan Stanley Capital International (MSCI) Index; pan-MENA, pan-GCC, take your pick. It’s just a matter of calculating. The next challenge is to develop a trade instrument, like futures or options. Exchange Traded Funds are the new tools used for investment purposes. I’m not sure if a pan-Arab index makes sense. Maybe a pan-GCC index would, because the GCC countries are comparable while the whole region remains so diverse.

Capuano: An index could be useful, as it would attract interest from institutional investors that the region currently lacks. When launching an index, you need liquidity and  a strong commitment from liquidity providers. It is worth trying.

Almadhi: No. We need a unified approach to indexing, however. We need to be careful that our markets are not vastly different.

 Krantz: It is too soon perhaps. When a market is getting started it tends to be nationally based, and then afterwards becomes inter-country. These markets need to establish liquidity — multiple pools of liquidity that are nationally based.

Erkan: An index is a good mechanism for institutions to follow markets, so a regional index would be a good idea.

E  Why are markets in the Middle East subject to such dramatic volatility?

Went:The economic cycle goes faster in the Middle East than elsewhere. It’s a consequence of a non-diversified investment base.

Capuano: [Because of] the small size of the exchanges. I believe in finding the right combination of pools of liquidity together with institutional investors; finance could contribute a lot to developing these economies. There is a lot of potential here.

Almadhi: Two things. The shallowness of the markets, the types of products traded… Second, industrial investors with large holdings in specific companies that don’t act on fundamentals, but hold their own positions and have their own approach to the market.

E  What characterizes the Arab investor?

Went:The Middle East has more retail investors than institutional investors. Once the economies move from frontier markets to developing markets, [according to the classification by MSCI] we’ll start seeing more institutional and long-term investors.

Capuano: It is important to address the issue of long-term versus short-term investors. However, encouraging a long-term investment mindset can be difficult. This is a role that technology could play, especially in reassuring investors through regulatory software. Also, a common set of rules could harmonize and stabilize Middle Eastern markets.

Almadhi: Most investors are retailers; they are sensitive to events. They’re short-term speculators. Speculation is healthy but not at such high levels. Add institutional investors, and you get long-term funds that don’t dry up in reaction to bad news. Getting long-term investors just takes putting together a road show and marketing it around the United States, Europe [and] the Middle East.

Al-Marhoun: We need to change the mindset of the Arab investor. The region has a lot of liquidity available for long-term investment. If we can convince funds to be invested in the region, investors would find that returns on investments are higher in the Middle East than in Asia.

E  When can Arab markets expect to wean themselves off the price of oil?

Almadhi: The non-oil GDP is growing sharply. We’re diversifying from oil through partnerships with third parties. Abu Dhabi is an example of this, though I can’t speak on their behalf.

Al-Marhoun: There is a clear need for diversification. But the end result won’t come before a year or two. Most Arab countries have begun to diversify. In Oman and in the UAE there is an emphasis on real estate.

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Finance

New year, new IPOs

by Executive Staff
written by Executive Staff

In 2009, markets were battered by a seemingly never-ending series of financial crises — burst bubbles, financial meltdowns, soaring oil prices, credit crunches and falling home equity. These crises have weighted down the initial public offering market since 2008, and yet, the regional IPO pipeline is full — 150 companies have already announced IPO plans for 2010 and beyond.

Analysts say that with pent-up demand for equity, a large pipeline of deals and realistic sellers, there is every reason to believe that 2010 will be the beginning of an active and profitable period for IPOs.

According to available data, a number of regional companies plan to list this year, reopening a market that has been virtually shut even as investors lapped up billions of dollars worth of newly issued bonds across the Middle East and North Africa region.

 

While regional and global investors nurse their wounds over Dubai World’s debt problems, there are scores of opportunities if one looks beyond the immediate crisis. With many of Dubai’s state-owned entities restructuring and struggling to keep their finances in order, the government may look to offload some of these assets, say analysts.

“A number of government-linked companies, such as Dubai World and Nakheel, have generated spectacular growth for the emirate’s real estate, shipping, transport and financial sectors over the past two decades,” notes a Societe Generale report. “Now part of that constellation of companies could be broken up as Dubai struggles under its heavy debt load. In some cases, firms could be dismembered or partially privatized.”

Many Dubai Holding and Dubai World entities can be knocked into shape for a public offering — Dubai International Capital, Jumeirah Group, TECOM Investments, and Dubai Group from Dubai Holding are assets that many investors would love to have in their portfolio… if they believe in the long-term Dubai story, say analysts.

Similarly, partial privatization or offering Dubai World’s Jebel Ali Free Zone and Istithmar World to the public may help the Dubai government raise finances, trim costs and focus on governance and infrastructure.

Meanwhile, new IPO announcements that came out at the end of December include big names such as Bahrain’s Gulf International Bank, with plans to float some of its shares in 2011, and Afghan carrier, Safi Airways, which is planning to launch an IPO within the next three years and list the company on one of the UAE’s stock exchanges. Abu Dhabi-based Tasheed Holding, a food and beverages conglomerate, said that it plans to launch an IPO in 2012 without providing additional details.

In Saudi Arabia, the hottest IPO market in the region, the Capital Markets Authority, or CMA, said it approved initial public offerings for three Saudi firms early next year. The Saudi homegrown fast food chain Herfy Food Services will offer 8.1 million shares January 11 through 17.

Al Sorayai Trading and Industrial Group plans to sell 9 million shares between February 1 and 7, while travel agency Al Tayyar Travel Group will offer 24 million shares on February 22 through 28.

In North Africa, Egypt’s private equity fund, Citadel Capital, which manages a portfolio of $8.3 billion worth of investments across 12 countries, said it would offer 12.5 percent of its shares to raise fresh capital. The company, which will be listed on the Cairo Stock Exchange, has not yet provided a date for the IPO.

Libya, not well known for IPO announcements, is putting the final touches on plans to privatize two state-owned firms through an IPO scheduled for the first half of 2010 said Soliman Shehoumi, chairman of the Libyan Stock Exchange.

Shehoumi said that an Iron and Steel Company and National Commercial Bank are schedule to go public “in the near future,” but he did not specify how much of the companies will be offered to the public and how much the government is seeking to raise.

The National Commercial Bank was scheduled to launch an IPO for a 15 percent stake of the company’s share in 2008, however, the plan did not move forward with officials citing technical delays. Central Bank Governor Farhat Omar Bin Guidara said earlier this year that the government would sell a 15 percent stake in the bank, worth $40.5 million, in 2009.

Although no one can predict the future, analysts say conditions in the global IPO market in 2010 are set to noticeably improve, particularly in comparison with 2009. However, the real rebound is not expected until mid-2010.

The IPOs of 2009

Economic fluctuations in Palestine

Palestinian Securities Exchange (PSE) has approved IPOs and the listing of four Palestinian companies for early 2010, with an estimated total value of over $200 million, said PSE Chief Executive Officer Ahmad Aweidah in December.

Wataniya Mobile, with $180 million of capital, will offer 53 million shares in February 2010, while the Arab Palestinian Investment Company (APIC) is planning a capital increase by $12 million to $70 million through an IPO.

Amaar Real Estate Group, the Palestine Investment Fund’s real estate development arm, with $220 million of capital, is the third company to launch an IPO on PSE, Aweidah said.

Club Deportivo Palestino, the Palestinian community’s first division soccer team in Chile, plans to launch its IPO by issuing 2 million shares at a price of $1 per share, raising its capital by $2 million to $20 million.   

Palestino Club, the only western company to be listed on the PSE, is also planning to be listed on Santiago Stock Exchange in Chile. 

Aweidah also revealed that there are ongoing discussions with 15 family-owned companies to encourage and prepare them to list on the PSE.

“Despite being the newest stock market, the PSE is the most advanced one in the Arab countries on the technical level,” said Ahmad Aweidah.

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Finance

Recovery’s lazy V

by Sami Halabi
written by Sami Halabi

 

The recession is over,” says Bill O’Neil, portfolio strategist at Merrill Lynch’s Chief Investment Office in London. That is the sentiment one gets when reading Merrill Lynch’s “Year Ahead 2010” report, authored by O’Neil. Speaking to Executive in Beirut as part of a whirlwind tour across the Middle East and North Africa region, O’Neil stressed that the global recovery would be “subpar” due to the nature of this recession, given that it was built around a banking crisis.

The nature of the recovery has been the topic of much contention during this current downturn.  Talk of the recovery curve being a “W”, “V”, “U” or “L” has been bantered about in economic literature, but with little consensus. As far as Merrill Lynch and O’Neil are concerned, the recovery will take the form of a “lazy V.”

Fear across the globe of a double dip, or “W-shaped” recovery, is unwarranted, according to O’Neil, given the particular elements he sees as carrying the world through 2010. The policy stimuli that typified late 2008 and 2009 will continue to fend off any unexpected dives, claims O’Neil, such as the one warded off in Dubai when Abu Dhabi stepped in and bailed-out the faltering emirate. This, coupled with close-to-zero interests rates, will allow the financial recovery to seep into the real economy thought 2010 — albeit producing lackluster results compared to previous economic upturns because of the “headwinds,” which will continue to affect the “speed limit of revival.”

The roller coaster tapers off

What stands out from the Year Ahead 2010 report is the predictions. Merrill Lynch believes that the current rally of the euro against the dollar will recede in 2010, landing the euro at $1.38 by June, and falling to $1.28 by the end of the year. O’Neil claims that the dollar slump will reach its end as the “overvalued” euro readjusts, and “undervalued” emerging market currencies come under more pressure to de-peg from the dollar and come into their own.

According to the report, an average price of $85 per barrel of oil is foreseen “above the forward curve.” The long-term aspect is even more promising as “monetary stimulus chases too few oil barrels,” said the report. Rising oil prices will be, in particular, the result of what O’Neil sees as raising emerging market demand, which would on its own push the price of oil over $100 per barrel. “Western markets cannot tolerate a $100 barrel,” he quips.

Other commodities are also expected to do well in the medium term. Gold in particular is predicted to hit $1,500 per ounce as it is affected by three factors: credit risk, dollar weakness and the strength of commodities. O’Neil, however, “wouldn’t be surprised” to see gold consolidate in the near term at $1,000 per ounce if the dollar rises considerably. “Gold will still have a financial following in terms of the ETF [exchange traded funds] demand on the basis that it is a hedge against some sort of policy miscalculation or failure,” he says. 

While fears over Dubai defaulting have been allayed for the time being, O’Neil says the continued presence of large amounts of debt will have a detrimental effect on offshore capital confidence, which has been “shattered” by the recent Dubai World debt standstill fiasco.

“There is an inconsistency, unpredictability, and a lack of transparency that has produced an unpredictable set of events. Markets are going to insist on a substantial risk premium in that environment in terms of funding ventures,” says O’Neil in reference to Dubai. Much of Dubai’s financial future will continue to depend, he reckons, on the actions of Abu Dhabi and its sovereign wealth fund, which contains $500 billion to $600 billion, according to O’Neil.

“There is an inconsistency, unpredictability, and a lack of transparency that has produced an unpredictable set of events. Markets are going to insist on a substantial risk premium in that environment in terms of funding ventures,” he adds, in reference to Dubai. Therefore Merrill Lynch’s prediction of just 2 percent growth in the United Arab Emirates in 2010 seems to hold merit.

What has been a roller coaster year for the world and the region looks to become less harrowing in 2010, though O’Neil insists that the ride is not over. He does, however, single out one region as being more or less a rock in the storm: “Offshore of the Levant, there is nothing normal about the current situation.”

Editor’s note: The original article was edited on January 20, 2010 to reflect the accurate Euro to US Dollar projection.

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Real Estate

Danger underfoot

by Nada Nohra
written by Nada Nohra

 

"Earth-shattering” events are relatively par for the course in Lebanon, with war, political upheaval and any number of social revolts rarely outside the realm of possibility at any given moment. The Lebanese, however, tend to focus on surface-level events to “rock” the nation, while few realize that below the ground they walk, an actual shattering of the earth is mounting.

“The possibility of a damaging earthquake happening in Lebanon is very high, and it is getting higher every day and every year,” said Ata Elias, assistant professor at the department of geology at the American University of Beirut (AUB), adding that the country could be hit with a quake reaching a magnitude of 7.5 on the Richter scale.

Lebanon stands on several major fault lines, which are cracks in the earth’s crust. Fault lines are at the boundaries between the earth’s tectonic plates and may range from less than a centimeter to several hundred kilometers in length. Tension can build along fault lines as the tectonic plates rub against each other, and if too much pressure builds the plates may shift, causing an earthquake.

The largest in Lebanon is the Yamouni fault that runs the length of the western Bekaa Valley, linking the Jordan Valley fault line to the Ghab Valley fault line in Northern Syria.

The Yamouni fault caused a major earthquake in 1202 A.D., and has a recurrence time of 800 to 1000 years, said Elias. Do the math, and you realize that the next major quake is set to hit between the years 2000 and 2200.

Lebanon’s many faults

The Yamouni is not the only fault putting Lebanon at risk, as there is another running along the coast — the Mount Lebanon fault — that is believed to have caused the catastrophic earthquake of 551 A.D., accompanied by a tsunami that hit the eastern Mediterranean and devastated the cities and towns along the coast. That earthquake is estimated to have had a magnitude of 7.5 on the Richter scale and caused 30,000 casualties in Beirut alone. The Mount Lebanon fault has a recurrence time of 1,500 to 1,700 years, which means another quake in the near future should not come as a surprise to anyone.

“We are now at a very singular moment in our geological history where we have two faults that might produce an earthquake,” said Elias.

Jordan, Syria and Palestine are also subject to seismic hazards and therefore any seismic activity that might be generated from these areas could affect Lebanon as well.

There are no means to know when exactly the major earthquake might occur, but that is not the sole issue since many smaller earthquakes are continuously taking place in Lebanon, such as the tremors witnessed in the south in February 2008, or the 5.3 magnitude earthquake that trembled Beirut in 1997.

The seismic hazard that Lebanon is subject to cannot be avoided, but the risk associated with the earthquake can be largely reduced by building safer structures and complying with seismic building codes.

Mohamed Hrajili, professor of civil engineering at AUB, said that it is very hard to calculate how many buildings in Beirut are built in compliance with seismic building codes, but gave an estimate of around only 20 percent. 

Hrajili added that the most vulnerable buildings are those between 8 and 15 stories high, due to the frequency with which the ground would shake as well as other technical factors that characterize earthquakes in Lebanon.

Even though the number of buildings resistant to earthquakes is very low, awareness on the issue started to rise in the early 1990’s when engineers started to adopt seismic building codes in their designs and a ministry decree was issued in that regard. Hence, many of the new buildings that were constructed after the Lebanese Civil War comply with some building code, whether American or European.

Heading off disaster

When the post-civil war reconstruction of Lebanon started, a team at AUB initiated a study identifying the seismic hazards that the country is subject to, and proposed a set of regulations for the construction and design of new buildings.

“We wrote a proposal to the directorate of urbanism saying that something should be done in this regard,” said Hrajili, who was involved in that study.

Lebanon was zoned under the 2B designation in the Uniform Building Code of the United States. In 1997 and 2005 respectively, decrees were issued and amended stating that new buildings should comply with the codes suggested in the decree or any other internationally recognized building code. Hrajili said the decree includes standards to meant to make buildings as safe as possible, and more importantly, to prevent them from collapsing.

“We can tolerate cracks in the buildings but we don’t want them to fall on peoples’ heads,” he said.

According to the decree, a report should be submitted to the order of engineers in that regard before obtaining a construction permit.

Although the decree was issued, the experts Executive spoke to said there is no strict supervision over the implementation of these codes.

“They ask for the file so they know the study is done, but they don’t have the means to check everything,” said Alexandre Richa, head of the department of construction and civil works at Apave, which runs technical oversight on construction sites to verify the solidity of structures and personal safety. Richa said there should be an implementation law that follows the decree, stating how inspection and control should be done.

Sami el-Khoury, director at the engineering company Rafic el-Khoury and Partners agreed with Richa, adding that even very experienced engineers might not be aware of the details that should be included in the structure, and that’s why a more thorough inspection should be carried out.

Cities at risk

In the event of an earthquake, high density areas are at higher risk, as buildings are closely lined up and will cause substantial damage and casualties if they collapse. These areas are in major cities like Beirut, Tripoli, Tyre, Jounieh and others. “I don’t worry about the Bekaa, for example, even though the fault passes there…the houses are remote and we can shelter these people more easily and save their lives,” said Hrajili. 

Another high-risk factor for Beirut and other coastal cities and communities is the possibility of a tsunami occurring, should the earthquake originate along the Mount Lebanon fault line. However, Elias said that tsunamis on the coastal line will not be higher than six to seven meters, thus mainly affecting the ports, the airport, and factories that lie in these areas.

Uncertain footing

Another worry experts point to is the fact that many districts and cities in Lebanon are built on sandy soil that has a high water content. If an earthquake takes place, soil liquefaction might occur and cause buildings and other structures to sink. Among the areas most at risk of this are the southern suburbs of Beirut, Bourj Hammoud, Tripoli and Damour. 

“There are measures that should be taken into account; in sandy areas you have to do a liquefaction analysis for the sand on which the structure is resting and that will give you an idea of how to reinforce the soil, so that you don’t have a sinking effect,” said Khoury.

Shoring up shaky infrastructure

Not only can new buildings be protected against earthquake hazards, but old structures can be reinforced to minimize the risks associated with tremors as well.

However, while holding new structures to building codes adds, on average, five percent to overall costs, reinforcing old buildings would be very costly, said Richa. “The cost may be equivalent to demolishing the building and rebuilding another one,” he said.

Still, there are some important structures that should be protected, as Hrajili explained, despite the high cost associated with it.

“Not every building should be repaired, but the most important ones like government owned buildings, hospitals, schools, ministries,” said Hrajili.

Better safe than sorry

Although architects and engineers in Lebanon have come a long way in terms of seismic awareness and building code implementation, there is still much to be done before Lebanon could be considered prepared for potential seismic hazards. 

“The government must create more awareness, like wearing seatbelts…now 80 percent of the people in Lebanon are wearing seatbelts because of the large [awareness] campaign,” said Khoury. He added that it is better to follow a certain methodology, because the cost of negligence is too high if an earthquake occurs and the country remains unprepared. 

Hrajili said the most important thing is to create stricter continuous supervision, in order to ensure that engineers actually comply with the building codes.

 

 “We only respect the code when there is an earthquake, for 1 to 2 years we pay attention and then afterwards we forget,” he added.

Building codes should be upgraded in accordance with geological and architectural studies.

“Codes should always be improved…take the example of the last earthquake that happened in L’Aquila, in Italy,” he added. On April 6 2009, an earthquake with a  magnitude of 5.8 on the Richter scale shook the city. More than 300 people were killed, more than 1,000 were injured and around 30,000 were left homeless.

Keep in mind that most structures in L’Aquila followed European building standards for protection against seismic hazards. The next earthquake in Lebanon will make painfully clear which of this country’s developers have been as scrupulous.

 

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Real Estate

A new nautical nucleus

by Nada Nohra
written by Nada Nohra

 

As it stands at the moment, Beirut’s newest yacht club doesn’t look like much. The cement floors have yet to be covered, the luxury apartments have yet to be furnished and the gym equipment has yet to be installed — and yet still, the yachts of posh foreigners and locals are moored outside like the highest class of club hoppers queuing to get into a joint that is yet to open. 

This is the Beirut Waterfront Development, a $150 million project in the heart of the Beirut Marina, north of Saint Georges and facing the Marina Towers. Upon completion, the project will stand on 22,351 square meters of reclaimed land and offer 20,000 square meters of built up area divided into two plots.

The first plot will include the 14,000 square meter yacht club. Alongside the yacht club construction machines are currently working on the foundation of a 6,000 square meter structure that will host a mix of 14 restaurants and retail outlets. The rooftop of this structure will hold landscaped areas and swimming pools. An additional 22,000 square meters of underground space will be dedicated to parking and technical areas. 

The project will open in phases. Restaurants will be completed by November 2010 and tenants will have five to six months to settle in before the official opening takes place in spring 2011. A few months later, the yacht club and residences will follow. By the end of 2011, the whole waterfront project is scheduled to be complete.

The Beirut Waterfront Development faced several delays, ranging from security issues to the complexity of building the understructure. The assassination of former Prime Minister Rafiq Hariri caused a prolonged shutdown of the whole area and thus halted construction work.

Farouk Kamal, executive chairman of Stow Waterfront Development (Stow) and director at Beirut Waterfront Development (BWD), said that the costly underwater construction of the parking and technical areas required more time than expected.

“We originally needed two years to finish the underwater construction, but it dragged on and it took us three years,” he said.

Samer Bsat, assistant general manager at BWD also explained that the complicated architecture of the yacht club delayed licensing, which caused the project’s completion further postponement.

The joint venture

BWD, the developer behind the project, is a 50-50 joint venture between Solidere and Stow. The agreement was signed in 2004, where Solidere’s contribution was in kind, as it provided 22,351 square meters of reclaimed land for the development, matched by $31.6 million provided by Stow. The rest of the money for construction will be funded through equity and local banks.

Stow’s involvement started with the 26-story Marina Towers project, located at the waterfront and completed in 2007. Solidere provided Stow with a tunnel linking the tower directly to the Marina.

“We sort of became curious about what is happening there, so we started following up… and then we agreed on the terms,” said Stow’s Kamal.

A strategic approach

The American company Steven Holl Architects designed the project in collaboration with Lebanese architect Nabil Gholam, who produced the detailed design. The purpose of the waterfront project is to create a new “human anchor” for all Beirutis and an attractive destination on the Mediterranean Sea for sailors, said BWD in a press release.

Kamal said that the waterfront development aims to complement the downtown area and become an active social hub that would be considered as a ‘Lebanon brand’.

“We are very proud of what has been set up,” said Kamal.

To make it easier for pedestrians to access the development, a bridge will link the project to the hotel district that will soon host the Al Hayat Hotel and the Four Seasons, and which already includes the Beirut and Marina towers, as well as the Monroe and Ramada hotels.

The development will be semipublic, thus allowing anyone to access to the restaurants, the green areas and the marina, while the yacht club will be reserved exclusively for members.

Sky high prices

The yacht club is already 85 percent complete, explained BWD’s Bsat. Some 16,000 square meters will be dedicated to apartments — 54 fully furnished luxurious flats — with the balance allocated to the club area. According to Kamal, the architectural design of the club was done in such a way that all units will have equally exceptional views.

A selling price has not been set for the apartments.

“The strategic decision is to get as [high] as we can [in prices],” said Bsat. Therefore BWD will not start selling apartments before they are completed, since [the finished apartments] would attain higher prices. “It is easier to be convinced to buy an apartment when you see it rather than on a plan,” he added.Kamal said the price tag on the apartments will be completely dissociated from prices of other real estate developments in the area.

“We are not related to the market in general, this is a unique project and the prices we will achieve will not be related to the surroundings,” he added.

Owners will have the option to lease the apartments in their absence. The leasing will be managed by BWD and apartments will have a ‘5-plus’ star service.

Joining the yacht club will also be expensive, but the fees, like the apartment prices, have not been set yet. Fifty selected personalities will represent the founding members, while normal membership will be open to 800 individuals.

Restaurants and retail

Fourteen different restaurants and eight or nine retail outlets will be hosted in the marina development. BWD has not sealed the contract with any tenants yet, but has received 150 “serious applications,” according to the company.

BWD spent a substantial amount of time investigating the right mix of restaurants at the Marina.

“We wanted to be sure that whoever is going to open will stay there for a long time,” said Bsat. Kamal added that “If we get a good Japanese restaurant, we avoid having a competitor next door.”

The restaurants, located below the level of the road in front of development, will allow the sidewalk above to be extended from 3 to 20 meters, with the roofs of the restaurants landscaped so as to offer the public a park-like experience while admiring the sea view.

BWD will also manage the yacht club and restaurants.

Branding BWD

The design is done, construction has started and the project is progressing quickly. However, one question remains unanswered: what to name the development?

Kamal said that the company is thinking of calling the area ‘Zeitouni’ (‘The Olive’), which was the name of the hotel district which faced the BWD a long time ago. This old area was considered as the place to be, and the heart of Beirut where all the restaurants and leisure facilities existed. For authenticity, Kamal added that they might plant a 1,000-year-old olive tree in the marina.

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Real Estate

On sliding sands

by Nada Nohra
written by Nada Nohra

 

With iconic projects that attracted international celebrities such as Donald Trump and David Beckham, the Dubai-based real estate developer Nakheel has always played an important role in fulfilling Dubai’s ambitious dreams.

Its Palm trilogy — Palm Deira, Palm Jumeirah and Palm Jebel Ali — has become a firm feature on Dubai’s map and is now symbolic of the emirate, not to mention the developer’s other distinguished projects such as The World and Discovery Gardens.

Nakheel was established in 2001 as the real estate arm of the state-owned holding company Dubai World. Its operations include real estate development, management, sales and fund management. Until the last quarter of 2008, the company surpassed expectations; launches of large scale projects were coupled with sky-high profits due to land sales and continual hikes in property prices.

Nakheel’s biggest achievements in 2008 were finishing the land reclamation of The World, officially opening Palm Jumeirah to the public and being named ‘Developer of the Year’ at the Arabian Business Achievement Awards.

When the global financial crisis started to rain down on Dubai’s real estate market, investors began to shy away, demand plummeted and prices followed. Consequently, most real estate developers, including Nakheel, began to shelf new project launches and cut costs by decreasing staff and advertising expenditures. Nakheel, being one of the pioneers in the market, repeatedly made headline news and its cash flow problems became the bellwether of Dubai’s real estate market.

The beginning of bad news

In October 2008, the slide started precipitously. Shortly after the Cityscape property convention of that year, Nakheel announced delays on several of its flagship projects, including the Trump International Hotel and Tower in Palm Jumeirah and the Universe Island. Work continued on projects such as the Madinat Al Arab, Canal District and others. The project delays were aimed to “ensure that our model is aligned to meet the market demand,” said the company at the beginning of December 2008.

These announcements came as a surprise to many. Shortly before Cityscape 2008 started, Chris

O’Donnell, chief executive officer of Nakheel, claimed that the global credit crisis would not affect plans for the one kilometer high Nakheel Tower. He said at the time that funds for the scheme would come from a combination of “pre-sales of land in and around the tower, and then project funding.”

Since the delays were announced, Nakheel has not resumed construction on any of its deferred  projects, with Donald Trump Jr. remarking at Cityscape 2009 that work on the Trump hotel will not restart anytime soon.

Building contractors reported that all construction companies working on the Nakheel Waterfront development were asked to accord a 30 to 40 percent discount, The National wrote in May.

Cutting costs

In an attempt to cut costs as revenues started to fall short, Nakheel announced in November 2008 its first mass layoffs, sending pink slips to 500 employees — roughly 15 percent of its workforce.

“We have a responsibility to adjust our short term business plans to accommodate the current global environment,” said the company in a statement at that time.

Concurrently, realty operators such as Damac, Omniyat and Tameer Holding Investment began implementing large-scale redundancies.

In July 2009, Nakheel announced another 400 job cuts, meaning that in nine months the company shed a total of 1,400 employees, leaving it with some 1,600 on the payroll as of July 2009, according to Zawya. Immediately following Cityscape Dubai in October 2009, Nakheel cut an additional 500 personnel.

Cityscape 2009

As Cityscape Dubai 2009 was about to commence, news surfaced that both Nakheel and its biggest competitor, Emaar, were missing from the list of exhibitors. To save face and prevent further erosion of confidence in the real estate market, both companies declared at the last minute that they would participate. 

Despite being officially present, company representatives were noticeably absent from the Nakheel stand at Cityscape, with only a hostess or two offering visitors paper to write down requests or queries. The assumption was that Nakheel would answer these at some point.

Reporting losses

On the financial side, Nakheel reported that its revenues in the first half of 2009 fell 78.1 percent to $536 million, relative to the $2.5 billion it took in over the same period in 2008. “Dubai real estate was impacted and as a result Nakheel sales volumes and transaction activities remained low [sic],” said the company in a statement.

It also announced that its liabilities for the same period increased 7.2 percent to $20 billion, as the company had a loss of $3.64 billion due to a large write-down of asset value, mainly land, and due to projects that were put on hold. The statement added that Nakheel was continuously reviewing its operational and overhead expenditures in order to meet the market’s opportunities and challenges.

At the beginning of 2009, reports emerged that Nakheel was considering plans for an initial public offering (IPO) to raise $15 billion to offset its cash flow problems. Speaking to the press on several occasions, officials from Nakheel neither confirmed nor denied the reports, but said that an IPO might be one of the funding options the company would consider. “We’ve got different options and an IPO is one of the options — it doesn’t mean that an IPO is imminent,” O’Donnell told The National in December 2008. Since January 2009, no further announcements were made in that regard.

The maturing sukuk

During the growth years of the real estate market, Nakheel issued three sukuks (Islamic bonds), to help finance its projects. The first three-year sukuk was issued on

December 14, 2006, and had a total value of $3.5 billion.

The Islamic bond had a profit rate — in other words a Sharia-compliant interest rate — of 6.345 percent. Over the three years since, Nakheel paid half the profit (3.1725 percent per year), leaving the rest to be paid on maturity. The sukuk was backed with land and asset collateral more than twice its value.

In addition to the 2006 sukuk, Nakheel issued two other Islamic bonds; Nakheel Development 2 Limited, issued in January 2008 with the value of $750 million due in 2011, and Nakheel Development 3 limited, issued in May 2008, valued at some $980 million. These bonds were set to come due in 2010.

By the end of 2011, Nakheel is scheduled to repay more than $5 billion in debt. Several months before the $3.5 billion sukuk bond came to maturity, investors started to question whether the company would be able to pay its liability in the wake of the liquidity crunch it was facing. As the bill came due, analysts expected that the probability of default would be quite low, since Nakheel is a Dubai World subsidiary and would obtain government support when needed.

“The Untied Arab Emirates authorities are acutely aware of the amount of profile the Nakheel 2009 sukuk instrument has in the international capital markets,” Chavan Bhogaita, head of credit research at the National Bank of Abu Dhabi, told Bloomberg late in October 2009. “In our opinion, they fully intend to repay this bond.”

 

The bond bomb

On November 25, Dubai world unexpectedly announced that it was asking its creditors for a standstill on its $59 billion debt, and on December 1, it said that the restructuring to the Nakheel and Limitless liabilities would total $26 billion.

In the first week of December, it was reported that cash-strapped Nakheel received a $2.45 billion cash injection as part of the $10 billion government aid program for businesses, launched in February 2009.

In mid December, Dubai received another present from its oil-rich neighbor. Through Dubai’s financial support fund, Abu Dhabi pumped another $10 billion into the indebted emirate, of which $4.1 billion went towards meeting Nakheel’s first sukuk repayment. Dubai world will use the rest to repay its contractors and suppliers.

A spokesperson from the Dubai Department of Finance said that the $10 billion received from Abu Dhabi will be repaid as a 5-year bond with 4 percent annual profit.

“[Nakheel] will honor all obligations related to the 2009 Nakheel Development Limited sukuk using funds that will be provided by the Dubai Financial Support Fund. In accordance with the terms of the sukuk the repayment will occur within the next 14 days,” said Nakheel in an announcement published on the Nasdaq Dubai.

Although Nakheel’s first debt will be repaid, the rest of the Dubai World obligations will still be negotiated for restructuring. As a next step, Dubai World is in negotiations with representatives of more than 90 banks to discuss the remaining $22 billion debt.

Whether Nakheel repaid its debt or not had implications for the six ratings Moody’s has for Dubai, as the ratings company told Bloomberg the sukuk was a “litmus test” for the accredited companies — DIFC Investments LLC (the investment arm of the Dubai International Financial Center), Jebel Ali Free Zone, Dubai Electricity and Water Authority, Dubai Holding Commercial Operations Group LLC and Emaar Properties PJSC. 

The credit rating agency Standard and Poor’s has described December’s developments regarding Dubai World’s debt as “steps toward rebuilding confidence,” but said it was uncertain about the ability of the government to bailout other firms.

What’s next?

There is no doubt that the ride has been rough for Dubai’s flagship developer over the last 15 months, and whether Nakheel will once again re-launch its ambitious projects and re-hire a workforce on the previous scale remains to be seen.

The main concern at this moment is for the developer and its parent company to meet their debt obligations; a default risks opening Pandora’s box on the property market and on Dubai as a whole.

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Finance

That sinking feeling

by Emma Cosgrove
written by Emma Cosgrove

After Abu Dhabi pledged $10 billion to help Dubai World pay off its $4.1 billion sukuk (an Islamic bond) commitments, global markets revived and the Gulf seemed to breathe a sigh of relief. But much of the damage to Emirati banks has already been done, with ratings slipping by the week and — market fluctuations aside — for foreign banks the worst may be yet to come.

The $10 billion covers the $4.1 billion in principal plus interest that was due on December 14, along with further interest payments due until April 30, with some funds still left over for working capital.

But Dubai World creditors still cannot be sure that they will get what is owed to them when their turn comes. Those banks without exposure to Dubai World were quick to spread this news and those with anything more than marginal exposure seem content to hide their heads in the desert sand.

Although small disclosures of exposure have been trickling into local media, especially in Asian markets, major creditors appear to be in a holding pattern while the restructuring details are determined.

Now that Nakheel’s first bond has been paid, all the banks can do is to “see if the other bonds default or whether they will be addressed in an anticipatory manner,” said Raj Madha, director of equity research at the investment bank EFG–Hermes.

In the meantime, a thorough look at Dubai World’s creditors can show who is counting most on these decisions and who, therefore, will most likely play the largest role behind the locked-door meetings between Dubai World, Dubai’s ruling class and roughly 100 creditors, that will follow in the coming weeks and months. 

Debts at home…

In its December 14 statement, the government of Dubai expressed concern for local creditors, saying it was mainly focused on repaying local trade creditors and ensuring the security of the United Arab Emirates’ banks. While Emirati banks are expected to be highly exposed, disclosure remains extremely limited. So far the only banks reporting exposure are Abu Dhabi Commercial Bank, at $1.9 billion, First Gulf Bank with at least $1.36 billion in exposure and National Bank of Abu Dhabi with $345 million.

Many Dubai and Abu Dhabi banks saw ratings drop in the weeks following the original announcement of the requested debt standstill, despite the liquidity facility offered by the UAE Central Bank until March.

Fitch Ratings was the first to the plate, slashing the ratings of Dubai Bank, Tamweel PJSC and Bahrain’s TAIB Bank on November 27 2009, giving Dubai Bank and TAIB Bank outlooks of “negative” and placing Tamweel on ratings watch for further decline. Standard and Poor’s came next, downgrading Emirates NBD, Dubai Islamic Bank and Mashreq Bank on December 3. Moody’s also downgraded the same three banks on December 12.

On December 16, Fitch Ratings announced that Commercial Bank of Dubai, Emirates NBD, Mashreq Bank, HSBC Middle East and Dubai Bank would remain on ratings watch negative “allowing for more information to arise and for the agency to review all of the rated banks’ audited financial statements.” The company’s statement said this review period would last for two to three months.

Robert Thursfield, director of financial institutions for Fitch Ratings, said they were not receiving full disclosure from the banks in question.

“It is part of the equation. Some banks have given us the information and some haven’t, but it’s also just giving more time for things to develop generally,” he said.

Even before the Dubai World announcement demolished markets and sent bankers rushing to tabulate their possible losses, Emirates NBD, one of the banks to see its ratings cut of late, had delayed a bond sale scheduled for early 2010 in anticipation of a rally in bond rates arriving as Dubai’s economy recovered from the credit crisis — this rally is no longer expected.

Mashreq, the largest privately owned bank in the UAE, was downgraded to “non-investment grade,” better known as “junk status.” Mashreq also disclosed that it is owed a total of $560 million by Saad Group and A.H. Algosaibi & Bros, the two Saudi family conglomerates embroiled in lawsuits over fraud allegations.

Exposure disclosure

Abu Dhabi Commercial Bank, which is reported to have one of the highest exposures worldwide, is on ratings watch as of December 15, according to Moody’s, along with the bank’s finance subsidiary. Commercial Bank of Dubai and Dubai Bank are also on Moody’s watch list.

But the news is not all bad. After the initial payment of Nakheel’s December 14 sukuk, Goldman Sachs raised investment ratings on National Bank of Abu Dhabi and First Gulf Bank to “buy.”

“Dubai is deleveraging and ironing out the excesses it has accumulated over the years, effectively shifting the UAE’s growth axis more toward Abu Dhabi,” said William Mejia, executive director at Goldman Sachs, in a December 17 press release.

Around the rest of the Gulf, exposure appears to be relatively low, with Kuwaiti institutions reporting $120 million of exposure, Qatar Islamic Bank reporting just $14.84 million and Oman’s banks totaling $77 million in exposure to Dubai World. Bahrain’s Central Bank governor has said that Bahraini banks have $281 million in exposure, though individual banks have released no figures.

 Lent from afar

Though British banks have the second highest exposure next to the UAE, they are not expected to see similar ratings cuts.

“Fitch does not expect any United Kingdom banking group’s exposure to these companies to be, in

itself, of sufficient size to affect its ratings,” said the ratings agency just days after the Dubai World near default announcement.

But foreign exposure is significant, in the sense that European and some Asian banks may have more to recover than their share prices.

Still, Dubai’s leaders have been reacting strongly to the international media frenzy.

“It has made a bigger splash in the world media than Lehman Brothers did going down, and yet its debt is the equivalent to that of a single European Bank. And we have oil, they don’t,” said Sheikh Maktoum Hasher Maktoum Juma al-Maktoum, chief executive officer of Al Fajer Group, at the Arabian Business Conference in December.

In some part, this is true. Many of the banks, which early in the news cycle were expected to have high exposure, have come out with statements to the contrary — though, of course, we can only take them at their word.

French banks were expected to be hit hard upon the announcement, but exposure in France appears to be relatively low. Natixis reported $50 million in exposure. BNP Paribas, Calyon, Dexia and Societe General have all reported reasonable, limited or low exposure without releasing figures. Deutsche Bank, another European heavy hitter, was also expected to have high exposure but has since stated it is free and clear.

The requested standstill has not only floored investor confidence in the financial health of Dubai, but also in the country’s ruler and the assumed guarantees behind a government-owned conglomerate such as Dubai World.

“We would argue that the situation in Dubai is somewhat unique in that the guarantees that may have been perceived to exist in the case of Dubai World were neither explicit nor sovereign,” said Deutsche Bank in a November 26 report. “The market may have assumed Dubai’s government backed the companies it owned, even though there were no explicit guarantees and Dubai had no material revenue sources of its own.”

Beside seeing a drop in investment and bond demand, banks acting as bookrunners for Dubai bond sales may run for the hills as well. HSBC, ING, Lloyds, Mashreq, Royal Bank of Scotland, Sumitomo Mitsui, Calyon and Tokyo Mitsubishi have all been employed as facilitators of Dubai World’s $5.5 billion in syndicated loans, which is part of the $26 billion in debt set to be restructured, according to Bloomberg. Bookrunners usually hold onto 10 to 20 percent of a bond and syndicate the rest to various lenders.

High noon

Dubai World officials are set for a showdown with nearly 100 creditors. Standard Chartered, HSBC, Lloyds, Royal Bank of Scotland, and local lenders Emirates NBD and Abu Dhabi Commercial Bank make up the steering committee on the creditor side, and the banks have hired Swiss auditing firm KPMG to audit proposals from Dubai World.  Aidan Birkett of Deloitte & Touche, another Swiss auditor, will act as the chief restructuring officer for Dubai World, while investment banks Moelis & Co. and Rothschild will serve as additional advisors.

Though many possible scenarios are being thrown around, the sole consensus is that this process will take time.

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