FEARS are growing among western banks that Dubai Holding, the personal investment vehicle of the emirate's ruler, Sheikh Mohammed bin Rashid al-Maktoum, will be the next state-owned Dubai company to default.
The conglomerate went on a debt-fuelled spending spree in the past decade, borrowing $12 billion (£7.3 billion) to fund ambitious projects in Dubai and to create a private equity arm that bought stakes in Tussauds and the budget hotel chain Travelodge.
Details of the main lenders to Dubai Holding are not public but bankers in Dubai say the group borrowed from international banks, including Royal Bank of Scotland and HSBC, as well as local lenders.
One official close to the company conceded the firm was "a bloody mess" and its boss, Mohammed Gergawi, a close confidant of Maktoum, had been "in denial" about the problems it faced. "It's true that we were a very large holding company with very few checks and balances on what we did and how we operated," he said.
However, he insisted the company had recently begun "restructuring and deleveraging in a sensible fashion". The once-sprawling conglomerate has been split into four divisions: property, leisure and hotels, investments and free zones - tax-free business parks in Dubai. Thousands of staff have been laid off, notably at Dubai Properties, the firm's indebted real estate arm.
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He insisted there "is money available to meet our debt obligations" but conceded that the firm would have to work hard to reassure markets that was the case. There is growing mistrust of senior Dubai officials because the announcement just over a week ago of a standstill on debt repayments by Dubai World, which has $60 billion of liabilities, was made three weeks after Maktoum categorically assured investors that Dubai would pay its debts on time.
Last week Dubai Holding denied the firm faced any problems repaying its debts but bonds in the company are trading at just over 55 cents in the dollar, reflecting a lack of confidence that it will meet its obligations.
Together, Dubai World and Dubai Holding are thought to account for 60% to 70% of Dubai's total debt. Research from Bank of America Merrill Lynch indicates that Dubai Holding has $1.8 billion due for repayment next year.
Analysts at Barclays Capital said in a note last week that Dubai Holding was most at risk of defaulting on its debts after Dubai World because it has extensive property assets, is highly leveraged and has already faced problems in the past year.
The revelation of problems at Dubai Holding comes as Dubai World, owner of P&O Ferries and the QE2 cruise liner, prepares to meet its creditors today.
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Insiders say the immediate focus is the $3.5 billion loan due for repayment by Nakheel, Dubai World's property arm, on December 14, which triggered Dubai's debt crisis.