Low levels of disclosure hamper improvements in Middle East market
Question marks about Dubai’s long-term financial stability had been circulating for some time, but when the day of reckoning finally came, few were ready for it. The news that Dubai World had defaulted on a $4.1 bn Islamic bond in November sent stock markets around the world into frenzied activity as traders feared another Lehman-style meltdown.
The timing of the news on Wednesday, November 25 could hardly have been worse: two days later, the Muslim world began a 10-day holiday to celebrate Eid al-Adha. The markets reacted angrily and the uncertainty proved difficult for IROs based in the region.
Husam Mahmud Basaddiq of Dubai Islamic Bank’s IR department recalls how he was woken at 8.00 am on the first morning of Eid by investors looking for help. ‘Unfortunately, they weren’t the only ones looking for answers – so was I,’ he says. ‘They felt they had been left out in the cold.’
Many shareholders assumed investment in Dubai World would be immediately underwritten, but it was a long and fraught 20-day period before the Sheikh of Abu Dhabi provided $10 bn for the refinancing of the Nakheel real estate company’s sukuk (Shariah-compliant financial certificates).
Other large organizations also had their debt refinanced successfully by the Dubai government; the Department of Civil Aviation won its reprieve in April 2009. But while the sukuk may have been saved by the Abu Dhabi government, for IROs the crisis was not over. ‘It was the worst situation imaginable,’ says one IR professional close to Dubai World’s bailout. ‘We were waiting days and days for announcements, and when one came it seemed off the cuff.’
Amelia Soares, head of IR and corporate affairs at the National Bank of Abu Dhabi, was more fortunate. The bank was one of the first in the region to disclose and she was able to announce its exposure the following day. Rasha El Hassan Chamut, head of IR at Dubai Financial Market (DFM), which owns the Dubai and Abu Dhabi bourses, was also able to state that neither DFM nor any of its listed companies were at risk.
A flawed system
According to El Hassan, the crisis exposed the flaws in the Dubai market. ‘The strategy in Dubai as a whole is to portray the situation positively,’ she explains. She feels IR is often left out of the loop when it comes to decision making: she first learned of DFM’s acquisition of main rival NASDAQ Dubai on the morning the deal was announced, having been directed to the press release by anxious investors on the telephone. ‘I had to say, I don’t know anything about this,’ she recalls.
Fears about the damage that has been done to Dubai’s credibility are shared by many around the world. ‘Everyone now knows about Dubai, but for all the wrong reasons,’ observes Basaddiq.
The ordeal was a learning curve for IR practitioners, according to Michael Chojnacki, vice president at BNY Mellon and co-founder of the Middle East Investor Relations Society (ME-IR Society). ‘What people need to understand – and what a lot of investors don’t understand – is that the UAE is a new market,’ he points out. ‘We have come a long way since 2000, but we are not at US or UK levels of disclosure.’
Growing pains
Dubai’s incredible growth story has, in some ways, contributed to its difficulties. The region’s first bourse, DFM, was founded in 2000 and its total value has quintupled between 2004 and 2010, according to Reuters. Soares and El Hassan claim the standard of IR has improved greatly due to an influx of experienced foreign IROs. ‘It shows companies are now serious about IR,’ confirms Soares. Basaddiq has also seen evidence of improvement: his department at Dubai Islamic Bank recently expanded to include three dedicated IR practitioners.
According to the ME-IR Society, however, there is more to be done. The body has already called for higher disclosure standards, an ambition that needs to be realized if the market is to win new investment. ‘Competition for increasingly scarce capital is global,’ says Chojnacki. ‘The Middle East is a comparatively small region that needs to stand up and compete with other emerging markets, such as those in eastern Europe and Asia.’
Chojnacki is not alone in seizing on recent events as an opportunity for reform and reflection. The Emirates Securities and Commodities Authority is also pushing for greater transparency: it issued a disclosure code with an April 9, 2010 compliance date. ‘I’m interested to see just how much disclosure has improved by June once all the reports are out,’ says Soares.
The market may also benefit from increasing professional certification. The ME-IR Society, founded in July 2008, will launch the Middle East IR Certificate later this year to encourage best practice. Further improvements are likely as more Dubai-based companies weigh up options abroad. DP World, Dubai World’s port operating subsidiary, will fulfill the London Stock Exchange’s ‘premium’ disclosure requirements if it lists in London later this year. And surviving the debt fallout taught many companies lessons you can’t learn in the classroom. ‘I feel I have practiced IR in the most difficult environment, at the most difficult time,’ Basaddiq says.
Timeline of Dubai's woes
2009
November 25
Nakheel real estate subsidiaries of Dubai World announce delayed repayment.
November 26
Government announces DP World is not included in the restructuring of Dubai World. The UAE begins 10-day holiday to celebrate the Islamic festival of Eid al-Adha.
November 30
Department of Finance announces that Dubai World debts are not guaranteed by government.
December 14
Abu Dhabi provides $10 bn for Dubai World ($4.1 bn used for Nakheel’s delayed repayment).
2010
January 4
Dubai’s tallest building opens, renamed Burj Khalifa in honor of the Sheikh of Abu Dhabi.
January 25
Standard & Poor’s withdraws its rating for Dubai Holding Commercial Operations Group, an investment vehicle owned by the ruler of Dubai, citing insufficient information.
Who will buy in Dubai now? asks IRO
A Dubai-based IR professional, who wishes to remain anonymous, comments: ‘Since early in 2009, concern had been expressed about real estate company Nakheel, and how it might be refinanced. Research was being done behind the scenes but very little in the way of public announcements followed. The message was, It’s all fine.
‘When the announcement came in November, therefore, it was a bombshell for everyone, crystallizing fears that had arisen up to then. Subsequently, the only information released concerned precisely what would be restructured and what wouldn’t. This was extraordinarily little to go on; from an IRO’s standpoint, it was difficult.
‘I was scheduled to be abroad for investor meetings but I knew nothing. I still don’t. It made no sense to speak to investors with no answers, so I cancelled the meetings. The situation is improving, but dented credibility has implications for funding and liquidity. It has completely changed the environment, but we don’t know by how much.
‘A lot of the debt issued was underwritten or sold on the basis that it had government support and now the government says investors have to take the pain. Who knows how easy it will be to find stability again? No investor in his or her right mind would buy in Dubai now.’
