British banks, which could lose billions of dollars after lending money to Dubai World, were under the false impression that the debt would be guaranteed by the Dubai Government when they made the loans.
The Times has obtained a copy of the law that created Dubai World and it clearly states that the Gulf emirate will not back the state-owned company’s debts.
However, banks including Standard Chartered, Royal Bank of Scotland and HSBC are thought to have invested in the company under the impression that an implicit state guarantee existed.
Banking insiders have claimed that in meetings between Dubai World and investors, executives gave the impression that this guarantee existed. Dubai World declined to comment yesterday.
The Government of Dubai last week announced that it was seeking a standstill on debt repayments by Dubai World, a conglomerate that includes property developers, investment funds and a ports operation.
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Dubai World has liabilities of about $60 billion (£36 billion) and is seeking to restructure $26 billion of debt.
Dubai’s Government has refused to bail out the company, prompting fears among lenders and bondholders that their money may not be repaid if Dubai World’s assets are insufficient to meet the liabilities.
When Dubai World was set up three years ago, a new law was passed to formalise its structure. Article 15 of the law states: “The Government shall not be liable for any debts or obligations payable by the Establishment [Dubai World] and its affiliates.”
People familiar with Dubai World’s borrowings said that banks and bondholders may have gained the wrong impression about the extent of the state guarantee.
One insider said: “There was a very strong impression that these guys [Dubai World] were underwritten by the Government. In hindsight you could argue that the banks did not do their due diligence, but they also thought they would receive full repayment if anything went wrong.”
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Concern about Dubai’s ability to meet its debt obligations caused widespread fears last week about potential bank losses. The Gulf state has since taken measures to tackle the crisis and Dubai World is being restructured and is set to meet its creditors next week.
British banks are the largest foreign investors in Dubai World, with an estimated $5 billion in loans to it.
Separately, neighbouring Abu Dhabi faces being forced to buy Citigroup shares at almost eight times their current value. Under a bailout deal signed in November 2007, the Abu Dhabi Investment Authority (ADIA) will next March start exchanging convertible bonds issued by Citigroup for common shares in the bank at a price of $31.83 per share. Citi stock last night closed 1.21 per cent down at $4.05. If it stays at such a level over the next four months, ADIA will pay 7.8 times the shares’ value. At the time of the deal, Citigroup described ADIA as “one of the world’s leading and most sophisticated equity investors”. Sheikh Ahmed bin Zayed al-Nahayan, ADIA’s managing director, said he was confident Citi would build shareholder value. In November 2007, Citi’s shares were $34.