With Dubai's Debt Plan on Shaky Ground, S&P Cuts DP World's Rating

Oil- and gas-rich Dubai does everything big, and that includes its debt -- all $60 billion of it. Given its size and scale, investors have reason to be concerned whether Dubai World, the investment arm of the second-largest member of the United Arab Emirates, will make its payments in a timely fashion.

It's worrisome then that Dubai World's proposed $26 billion debt settlement plan isn't quite a done deal yet. If even one creditor files a claim, the entire settlement could be thrown into semi-chaos, according to a Reuters report.

The plan was to set up a tribunal of three judges to oversee Dubai World's debt restructuring. Most banks and creditors voiced support of the deal initially, but now the concern is that if any of its creditors have a change of heart and decide to file a claim, there could be lengthy delays in what was supposed to be a widely supported resolution.

Dubai World Debt Panic

And there's reason for creditors to be unhappy with the settlement, given that banks might have to book losses for the year on Dubai-related debts.

When Dubai World (an investment arm of the emirate) said it needed more time to pay back some $26 billion in debts in November, the markets panicked amid concern that the problems could escalate and eventually become an ugly case of sovereign default. The Dow Jones Industrial Average fell more than 150 points during the trading session on Nov. 27.

Still, people generally expected that oil-rich neighboring emirate Abu Dhabi would put up the cash to bail out Dubai. Last month, the Dubai government said it would foot the bill on a $9.5 billion lifeline to cover Dubai World's debts. Of the $9.5 billion, roughly $5.7 billion came from Abu Dhabi loans.

And although it seemed somewhat encouraging that more than one-third of Dubai World's outstanding debts would be converted into equity, it hasn't stopped Standard & Poor's from worrying about how the state-owned businesses will repay outstanding debts.

DP World Ratings Cut

On Thursday, S&P cut its rating of DP World, a port operator that's majority-owned by Dubai World, to "BB" from "BB+" with a negative outlook. DP World was at the center of a media frenzy in 2006 when it gained the right to operate several U.S. seaports after it bought the London-based operator of those facilities, raising concern about port security. DP World ultimately sold the contracts to run the U.S. ports to an arm of American International Group.

S&P's rating cut on DP World debt was based on concern that the state-owned business would be left hung out to dry by the government and a weaker-than-expected financial profile in 2009. "The negative outlook reflects the remaining risk associated with possible knock-on effects until the debt restructuring of the DWC group is completed," Standard & Poor's says.

The credit rating agency is also fretting over the unpredictability of DP World's debt reorganization and the fact that the UAE is a "relatively unfriendly" jurisdiction for creditors. Says S&P: "Until this process is accepted by creditors and completed, we have no certainty that DP World will be totally insulated." Investors have little reason to disagree.