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A lesson not learned: Abu Dhabi debt confusion needs clearing up
Reuters columnist Una Galani things that even with debts between TDIC and Aldar, the UAE capital has not learnt any lessons from history at all. Will it survive its next financial move?
July 12, 2011 10:26 by Reuters
Abu Dhabi needs to clear up its debt confusion. First, property developer Aldar. Now the Tourism Development and Investment Company (TDIC). In both cases, the emirate is fudging on whether the debt of either government-owned entity has an implicit sovereign guarantee. The difference is worth billions. Both to investors, and to Abu Dhabi’s economy.
The lessons from Dubai World obviously have not been learnt. Abu Dhabi says it won’t guarantee the debt of TDIC for its current $3 billion bond programme, but in the same prospectus it states that it “backs TDIC fully and unconditionally”.
The mixed message is similar to what led Moody’s last month to cut the credit rating of Aldar, the property company that built the island home to the Ferrari World theme park. The ratings agency then cited uncertainty over future government support for the developer, already the recipient of a $5.2 billion bailout.
It should be an important distinction for investors. Dubai World’s bank creditors have taken haircuts on the loans they effectively made to the now debt-laden emirate. TDIC has a credit-rating aligned with the Abu Dhabi sovereign and is in charge of flagship projects, such as developing Louvre and Guggenheim museums in the capital. But it has made a net loss every year from 2008 until 2010, before scaling back. Aldar was a similar beast until the property market collapsed.
Nor is it an insignificant sum for the government, even though Abu Dhabi can use its vast foreign reserves to clean up after itself — unlike its wayward neighbour. The distinction is worth up to $92 billion. Or at least that is the amount of contingent liabilities the IMF estimates relates to Abu Dhabi’s government-related debt. Put another way, that’s the difference between a government with debt worth 6 percent of GDP — or 55 percent.
TDIC is going to the bond market at a time when other issuers are frightened off by the crisis in the euro zone. In light of Aldar’s experience, it is unclear why TDIC is tapping markets at all to fund its huge government projects. Bank financing would be cheaper. Public issues might help government entities learn to stand on their own two feet — but it’s a costly and potentially damaging way to force the public sector to grow up.
Abu Dhabi will not guarantee the debt obligations of Tourism Development and Investment Company but reiterated that it “backs TDIC fully and unconditionally” in prospectus for a $3 billion bond programme for the master developer of the Louvre and Guggenheim museums in the capital.
In June, Moody’s downgraded the credit rating of Abu Dhabi’s Aldar Properties by two notches, to B2 from Ba3, citing uncertainty over future government support for the struggling developer rescued by a $5.2 billion bailout earlier this year.
Abu Dhabi’s sovereign debt amounts to 6 percent of GDP but rises to an estimated at 54.8 percent of GDP when including outstanding debt of government-related entities, according to an IMF working paper published in June.
The IMF paper estimates that Abu Dhabi has contingent liabilities stemming from over $92.4 billion in government-related debt.
Moody’s downgrades Aldar to B2 from Ba3
TDIC prospectus: http://www.rns-pdf.londonstockexchange.com/rns/3692J_1-2011-6-29.pdf
Una Galani is a Reuters Breakingviews columnist. (Editing by Pierre Briançon and David Evans)