Abu Dhabi bails out Dubai with $10 billion

Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month.

Dubai World will use the money to cover debt of real-estate unit Nakheel PJSC that comes due on Monday. The rest of the money will cover Dubai World’s interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai’s government said in an emailed statement.

After the emirate and its state-controlled companies borrowed $80 billion to diversify away from dwindling oil supplies, Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, has been forced to seek Abu Dhabi’s help three times this year as the global financial crisis dried up credit and triggered a property crash in the city state.

“It comes as a relief for the market, underpinning hopes that the implicit government support for Dubai corporate issuance is intact,” said Jason Watts, head of credit trading at National Australia Bank Ltd in Sydney. “Whilst we are not out of the woods yet, it is definitely a step in the right direction.”

The Dubai Financial Market General Index climbed 10 per cent, the most in 14 months, leading a worldwide rally in equities that drove the MSCI World Index up 0.4 per cent. Dubai’s November 25 announcement that state-owned Dubai World would seek to delay debt repayments spurred the emirate’s steepest stock- market selloff in 13 months and Europe’s worst rout since April. Nakheel’s $3.52 billion sukuk tumbled as much as 62 per cent in three days, according to Citigroup Inc.

“The fund injection gives some leeway to Dubai World to put together an orderly debt restructuring plan as it tries to alter its debt profile,” said Abdul Kadir Hussain, chief executive officer of fund manager Mashreq Capital DIFC Ltd.

Nakheel’s Islamic bonds due in 2011 surged to 67.5 cents on the dollar after halving in value to as low as 37.5 cents, according to Citigroup prices. Dubai’s benchmark share index jumped to 1,871.2. The measure had lost 19 per cent since Dubai World on November 25 sought a “standstill” agreement on its debt.

The cost of protecting investors against Dubai defaulting on its debt tumbled the most since February. Five-year credit-default swaps on Dubai’s debt fell 135.5 basis points to 405, according to CMA DataVision prices.

Abu Dhabi’s support “provides funding and a stable basis for the restructuring process, which continues,” Dubai World said in an emailed statement.

The terms of Monday’s transaction won’t be disclosed it was an internal transfer between the two governments, a source close to the Dubai government told reporters in a conference call.