Dubai World debt problems create airline uncertainty; interests wide and pervasive


Dubai World’s move to defer debt repayments and restructure its organisation (not for the first time this year) has global implications. USD59 billion in debt is large by most standards, but not intrinsically debilitating for the global markets. For aviation, the implications could be significant. The group has extensive and diverse airline and related investments. These stretch into many areas of activity, from an investment in EADS to Indian low cost airline, SpiceJet.

Its investment arm also has a massive aircraft order book, with both of the major manufacturers. It was a big buyer too at last month’s Dubai Airshow, fortunately completed before the Dubai World debt revelations.

This review identifies some of the related entities, without however seeking to make judgments or speculate on what is likely to happen to them as a result of Dubai World’s action. At this stage, with little information available, and the issues probably still being negotiated, projecting what might happen is merely a gamble. But it is near-certain that there will be flow-on effects, some of them quite remote and unexpected, given the far-reaching investment portfolio.

The breadth of interests of Dubai World is such that its financial future is inevitably involved in the enormous new Jebel Ali development, which houses not only a massive new airport complex but also the associated commercial activities and a multimodal hub. Nakheel, the real estate developer and investor, seemingly has involvement in every large new development in Dubai, as well as many parts of the world.

Previous moves to restructure

As recently as Sep-2009, Dubai World restructured its activities, moving hotel and property assets, from the development arm, Nakheel to Istithmar World, the investor side of the group. The move was apparently partly at least to reassure foreign investors, as concerns grew about the company’s ability to repay the debt which falls due this week. Dubai World described the changes as "part of an ongoing organisational operational restructuring process within the group."

Back in September, the unsourced “media report” which Istithmar carries on its website, suggested that “Istithmar (was) one of the flagship companies of state-owned Dubai World, which has been hit hard by the global financial crisis.” It continued, “Its real estate unit Nakheel, famous for developing man-made islands shaped like palms, is being closely watched for its ability to refinance $3.52 billion of Islamic bonds, maturing in December.”

The financial impact is now more muted

After an immediate attack of the financial jitters on European share markets, the Dubai World “crisis” appears to be losing steam as more facts emerge and as the scale of the worst case potential losses is put into global context. Wall Street has treated it almost as a non-issue over Thanksgiving, as well as when the market was open for the first full day after the break.

However, there still remains an elevated level of sensitivity in credit markets, especially in Europe - and the UK in particular - where debt exposure to the organisation is highest.

A high official, Sultan Nasser al-Suweidi, made it clear yesterday that the emirate considers Dubai World to be an independent body and had “advice for foreign investors. They should study available investment opportunities and conduct realistic feasibility studies to make sure they are real opportunities with no risk,” according to a Reuters report citing the state news agency WAM. Dubai was not, in these terms going to be standing behind the Dubai World debt.

The aviation context: every asset will now be audited

As the debt deferral/restructuring is put into context and as some more clarity emerges about what might happen as Dubai World’s mountainous debt problem is resolved, there are several threads of interest in the aviation sector in particular.

Probably most important is firstly the role that Abu Dhabi will play in securing any debt coverage or perhaps acquisition of actual assets; and, secondly, the extent to which Dubai World may be forced to liquidate any or all of its assets as part of a promised restructuring, acceptable to its creditors.

In the absence of any sovereign guarantee, liquidation of some assets would seem inevitable as the price of gaining creditor approval for any restructuring of the debt. And, what that generally means is it will essentially be preceded by an audit of every asset in which the group has an interest.

Whatever help Dubai might seek from the federal treasury of the UAE – effectively meaning Abu Dhabi – there would almost certainly be strings attached. And it is likely that those too would involve the need to liquidate some of the assets, encumbered or not.

It has been suggested for example by one bank that, although largely independent of Dubai World, Emirates Airline may be used as collateral by its government owner. This is a backhanded compliment in some ways to an airline that is often accused of being government subsidised and uncommercial. But it has to be an unlikely scenario.

The Istithmar World portfolio is expansive

A key part of the Dubai World empire is Istithmar World (IW), a “world-class investment company with a broad portfolio of successful firms in markets ranging from North America and Europe to Asia and the Middle East, as well as across a variety of sectors ranging from consumer, industrial, financial services, aviation and natural resources. Based in Dubai, with offices in Shanghai and New York, the firm invests through its three separately managed divisions”:

(1)        IW Capital,

(2)        IW Ventures and

(3)        IW Aviation Holdings.

…and highly leveraged

Istithmar has, according to reports, been on shaky ground for some time. Its reputedly heavily aggressive private equity style buying had, suggested some analysts, been leveraged at very high levels, making it vulnerable to a downturn in asset values and a credit crunch. It was unfortunate in its timing too, as many of its acquisitions were made during the boom times of 2007/08.

By virtue of their investment functions there is some overlap between the activities, but the bulk of aviation activity is under IW Aviation Holdings, whose investment strategy is, according to its website, “to earn strong returns through the acquisition and, in some cases, active management of substantial investments in key locations around the world. Istithmar World Aviation Holdings has recently committed to setting up an aircraft servicing facility in Dubai World Central, the future Al Maktoum International Airport at Jebel Ali, Dubai, to build and equip hangars to cater to the growing demand for corporate jet and air charter services.”

But there is a lot more than that. IW Aviation Holdings’ three main entities/investments are described as:

(1)        Dubai Aerospace Enterprises (DAE),

(2)        an executive jet operation, IWA Executive Jets, and

(3)         a small African airline, Daallo Airlines.

Daallo Airlines is handsomely presented: “Over 17 years in Africa's aviation industry, Daallo has become a major regional airline and has developed a brand name with reputation for reliability. The airline has entered into a strategic partnership with Istithmar World Aviation Holdings and the Government of Djibouti to enhance and promote air transportation services in Africa. It will enable Daallo Airlines to acquire new aircraft, modern systems and access to new markets. The venture will focus on developing Daallo Airlines current routes and networks, expanding to new markets in Africa with the ultimate aim of becoming a premiere carrier in Africa with special focus on the Horn of Africa and COMESA region.

According to Daallo’s own website, “Daallo Airlines fleet consists of 757-200, 727-200, AN24, with IL76 and AN12 for the cargo operations. 
In 2008, DAALLO Airlines entered into a strategic partnership with Istithmar World Aviation Holdings, an investment arm of Dubai World, and the Government of Djibouti to enhance and promote air transportation services in Africa.” The geography is undoubtedly strategically valuable, but considerable further investment would be necessary for its exploitation.

IWA Executive Jets is targeted at the undoubted demand for premium charter travel in the region: “IWA Holdings operates IWA Executive Jets, a wholly-owned commercial executive jet operation, which IWA Holdings intends to grow into the preeminent managed aircraft, executive charter and technical services organization in the Middle East.

According to the Istithmar website, its fleet consists of

1 x Global 5000 – 2007 – 13 seats

1 x Gulfstream IV SP - 2000 - 16 seats

3 x Legacy 600 - 2006 / 2007

DAE is however by far the major investor of these: “Dubai Aerospace Enterprise (DAE)….is rapidly becoming a leading force in aircraft maintenance and leasing,” reads the website.

“Headquartered in Dubai, Dubai Aerospace Enterprise is an emerging aerospace corporation that encompasses manufacturing, services, airports and education. DAE comprises of six divisions - DAE Capital, DAE Manufacturing, DAE Airports, DAE University, DAE Engineering and DAE Services - and is growing through a series of phased developments. DAE is forming international partnerships at the highest level of industry with the aim of establishing one of the most innovative and successful businesses in the global aerospace industry inside the next decade. The group will grow through a series of phased developments to produce an integrated aerospace cluster, based at Dubai World Central and logistics city in Jebel Ali, Dubai.”

DAE began with a bang and a reputedly large amount of money to invest. Not all of its ventures have flourished, as staff proved difficult to retain during the heady boom days in the middle of this decade and a multitude of tasks was difficult to achieve overnight. But it has nonetheless become a formidable operation.

SR Technics, the first large aviation investment

DAE has a 30% holding in SR Technics. This is a relatively rare joint venture between Dubai and Abu Dhabi interests. SR Technics is jointly owned by Mubadala Development Company (70%) and DAE (30%). SR Technics is a very substantial entity in maintenance and engineering/integrated systems. Formed out of the bankruptcy of Swissair in 2002, a private equity group sold it on to the consortium in late 2006, for EUR1 billion.

SR Technics has however been under the gun too, understandably when many airlines were hovering on the brink of bankruptcy themselves, through 2009. MRO operations were in the front line for feeling the airlines’ pain. The Irish operation had been shut down in Mar-2009, with the loss of over 1,000 jobs. Formerly known as FLS, Team Aer Lingus and Aer Lingus Maintenance, SR Technics had lost three aircraft maintenance contracts with Aer Lingus in 2008, then Gulf Air, announced it was terminating a maintenance contract from Jun-2009.

 More recently, on 31-Oct-2009, the Los Angeles Daily News sourced “spokesman Dominik Mueller” as saying “SR Technics America Inc.'s parent company is in dire financial straits, requiring an influx of $18 million by Nov. 9 or it could go bankrupt…Airplane maintenance company SR Technics also needs an additional $144 million over the winter if it is to keep operating.” Realistically, with Mubadala as the majority owner this seemed unlikely, but the market was becoming concerned.

But, with parents associated with major airlines Etihad and Emirates, the operator does potentially have an underpinning. At the Nov-2009 Dubai Airshow two weeks ago, SR Technics concluded a “major component maintenance agreement” with Etihad. “The new ten year Integrated Component Services (ICS) contract offers potential revenue of USD 250 million.”  On the same day “easyJet signed an agreement for an 11-year renewal and extension of their maintenance cooperation. This landmark contract (offered) a revenue potential of USD1.6bn”

Aircraft leasing

The real meat in DAE has however evolved into a leasing operation.

At the Dubai Airshow in Nov-2007, DAE made its appearance on the world aircraft market with a stunningly large “order”:

Dubai Aerospace Enterprise (DAE), the global aerospace, manufacturing and services corporation, has today signed a $13.5 billion letter of intent with Airbus for the purchase of up to 100 aircraft. The price incorporates an associated deal with Rolls-Royce for its Trent XWB engines to power the A350 XWBs, worth some $1.2 billion at list prices.

HH Sheikh Ahmed bin Saeed Al-Maktoum, Chairman of DAE, said: “We are confident that DAE Capital will quickly become a leader in the aircraft leasing business, and this deal underlines that confidence.”

Part 2: “Investors in Aircraft, airlines and manufacturer”: tomorrow.

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