Is Dubai's Istithmar a Dead SWF Walking?

♠ Posted by Emmanuel in , at 9/17/2009 11:06:00 AM
Bloomberg first mooted that the SWF of the famously free-spending emirate of Dubai was in deep trouble. The story of Dubai is a familiar one by now. Critics would say it's reminiscent of the Tower of Babel at home when massive skyscrapers--each new one more outlandish than the last--were put up in quick succession. However, Istithmar's problem is largely one of properties bought outside of Dubai. From a marketing point of view, I understand what they were trying to do in buying up luxury brands the world over: the SWF thought these names could be leveraged at home...when the time comes. (Flashback to fears of Japan buying up prime properties in America prior to Black Monday.)

However, it now seems that that time may never come as Dubai's Istithmar has vastly overextended itself and is in imminent danger of joining the Great Hedge Fund Manager in the Sky. From a recent Bloomberg report quoting my authority on SWFs, RGE's Rachel Ziemba:
Dubai investment firm Istithmar World may be the first sovereign wealth fund to liquidate after a $27 billion spending spree financed largely with borrowed money, people briefed on the matter said. Unlike government-controlled funds in Kuwait and Abu Dhabi, flush with cash from oil production, or in China, backed by export earnings, Istithmar fueled purchases such as the takeover of Barneys New York by borrowing as much as 90 percent of the money, the people said. Istithmar’s parent, Dubai World, tapped Middle Eastern and European banks including Barclays Plc, Royal Bank of Scotland Group Plc and Deutsche Bank AG, leaving those three with combined debt holdings of at least $1.5 billion, the people said.

“Dubai sovereign wealth funds are leveraged like private equity funds,” said Rachel Ziemba, a senior analyst covering sovereign wealth funds at Roubini Global Economics, a New York- based economic research firm. “Istithmar belongs to a parent company with a significant amount of debt coming due.”

Istithmar contributed about $2.5 billion of its own cash to back $27 billion of purchases since 2003, the people said, speaking anonymously because the strategy was private. It used so-called non-recourse bank loans, backed by specific assets, to finance about 75 percent of its acquisitions, one of the people said. The rest was funded with a mixture of its own cash and money borrowed from banks on a term-loan basis that was backed by Istithmar or Dubai World, the person said.
You can read more about it buying the QE2 and a stake in Cirque de Soleil while defining the top of the property bubble. In any event, the Bloomberg report seems to have put Istithmar on shaky ground, forcing action sooner or later on the emirati's part. From Abu Dhabi's National:
To the substantive issues of the Bloomberg report, that Istithmar might liquidate and that there was some kind of “fire sale” of assets under consideration, a DW [parent company Dubai World] spokesman came out with this: “Istithmar World underlines that it is a privately-held investment house and is one of DW’s key subsidiaries, actively managing a portfolio of investments world wide, and will continue to be a key subsidiary into the future.” That is a less-than-wholehearted commitment to Istithmar’s future.

There is a delicate game being played here between DW and its banker creditors. If it admits openly it is considering a distressed disposal of assets, it will damage the value of those investments. If on the other hand it asserts publicly that it will sell nothing, its creditors, desperate for some sign that they will get their money back, will lose heart and might pull the plug.
Abu Dhabi has helped bail out its prodigal fellow emirati Dubai so far. Thus, it now calls more and more of the shots on what's to become with the latter's fate. So it is here: if Abu Dhabi will act as lender of last report when Istithmar's manifold debts come due soon, it may live still. However, don't be too surprised to see it wither if Abu Dhabi demurs.

It goes without saying that we should expect fireworks soon.