Dubai Inc. Debt Distress Emerges as a Risk for Corporate Sector

(Bloomberg) --

Bank of America Corp. warned that “more corporate distress” is possible for some of the debt owed by Dubai government-related companies in case of a prolonged economic downturn.

Excluding the government and banks, Dubai Inc. has about $6.8 billion of loans and $3.1 billion in bonds is coming due in 2021 and 2022, according to BofA Global Research. “These could be most at risk because we see Abu Dhabi and central bank support to the sovereign and banks, if required,” BofA economist Jean-Michel Saliba said in a report to clients.

The disruptions from the coronavirus pandemic have paralyzed the Middle East's main business hub. It only recently started easing the restrictions that shut much of its economy. Just over a decade ago, Dubai needed a bailout from oil-rich Abu Dhabi, the biggest of the seven sheikhdoms in the United Arab Emirates, to support state-controlled companies through the global credit crisis.

“The Dubai Inc. complex could be vulnerable to a sustained halt to financing flows,” Saliba said. “Liquidity provision may need to be supplemented by capital injections as the effects of a lockdown are non-linear; sustained revenue losses could generate corporate solvency concerns if the recovery is shallow.”

Unlike Gulf neighbors that have opted to tap public markets this year, Dubai has looked to raise capital by means of private placements and bilateral loans. BofA projects Dubai's fiscal deficit could widen this year to $4.4 billion, or 3.9% of GDP, from a budgeted $600 million. It's estimated at $6 billion, or 5.3% of GDP, counting interest paid on Emirates NBD's sovereign loan, according to the report.

Dubai's economy may contract about 5.5% in 2020, followed by what BofA believes could be a “shallow subsequent recovery”
Most of of the financing of Dubai's fiscal deficit or a potential liquidity injection into government--related entities is likely to be done domestically through Emirates NBD PJSC loans.
BofA said Dubai's government debt “is likely to increase further” after rising to an estimated 65.6% of GDP in the first quarter of this year, from 47% of GDP in 2011.
- Dubai Inc. publicly held debt seen at 110% to 165% of GDP last quarter
Related party bonds and loans account for 86.5% of total Dubai government debt; bonds and bilateral/syndicated loans make up just 7.3% and 6.2% of total Dubai government debt, respectively
As of December 2018, BofA estimates the Dubai government's outstanding stock of guarantees and contingent liabilities was at $10.9 billion, or 9.7% of GDP.

“The composition of debt appears to have shifted from weaker entities to more financially sound ones and to the government,” Saliba said.