THE DUBAI DEBT CRISIS

The credit crunch in Dubai raises alarming questions about the potential effects on the global Thoroughbred bloodstock business, as demonstrated by articles in major newspapers in the past week. Sheikh Mohammed bin Rashid al-Maktoum, Prime Minister and Vice President of the United Arab Emirates (UAE) and the Emir of Dubai, is the leading Thoroughbred owner in the world and the driving force behind the gamble on growth in Dubai that led to the current state of affairs.

Following are two analyses and a closing commentary.

Dubai Crisis. The likelihood is that the situation in Dubai is not the beginning of a new worldwide debt crisis, but rather, is a lagging effect, or a repercussion from the global financial debacle in the Fall of 2008 and early 2009. The size of the aggregate Dubai debt has been estimated to be about $80 billion, but some experts believe it to be closer to $120 billion.

Abu Dhabi, the location of the UAE’s federal government, has the immense wealth from oil to support the UAE banking system so that it does not default. Even though the powers that be in Abu Dhabi are reportedly “furious” with Sheikh Mohammed and others in Dubai, they have pledged to back up all domestic banks and subsidiaries of foreign banks operating in the UAE.

Dubai World, Dubai’s “flag bearer in global investments” (quote from the entity’s website) is another matter. Dubai World’s debt, approximately $60 billion, is not guaranteed by the emirate’s government and Abu Dhabi is showing no inclination to come to the rescue. The debt must be paid from the cash flow from Dubai World investments. These assets are described on the Dubai World website:

“As a holding company [Dubai World] operates a highly diversified spectrum of industrial segments and plays a major role in the emirate’s rapid economic growth. Its primary aim is to play the role of a growth engine that powers development both locally and internationally. Dubai World’s investment spans four strategic growth areas of 21st Century commerce namely, Transport & Logistics, Drydocks & Maritime, Urban Development and Investment & Financial Services.”

 Ironically, in light of the present dire straits of Dubai World, the website says: “The company’s business strategy is driven by a combination of pragmatic acquisitions and prudent investments, designed to deliver real, measurable results to all its stakeholders. “

Dubai World’s debt burden will be ongoing, as it restructures the terms of the debt and extends the repayment schedule. Whether the Dubai problems will extend to other emerging nations is a monumental risk looming over the worldwide economy.

Effects on the Bloodstock Industry. I was at a corporate board meeting last week and the topic came up of how much the worth of a company is diminished as its reliance on a single customer increases. Everyone agreed that, while the single customer’s business is essential, the overall value of the company is less than it would be if the customer base were widely diversified. The 80-20 rule of thumb says that, for most companies, 80% of the revenues and profits derives from 20% of the customers. In some cases, 95% or more come from a very small percentage of customers and this dependence dramatically ramps up the risk for a company in such a vulnerable position.

Sheikh Mohammed bin Rashid al-Maktoum and his far-flung breeding and racing empire (Darley and Godolphin) constitute a single-customer threat to bloodstock businesses and racetracks worldwide. He has been the leading buyer at Thoroughbred auctions for years and, in fact, is the most important purchaser in modern history. Were he to sneeze, so to speak, the bloodstock industry would get pneumonia.

John Ferguson, Sheikh Mohammed’s chief bloodstock advisor, commented on the debt dilemma in Dubai by saying that the Sheikh’s racing and breeding operations are separate from the imperiled business operations. This is no doubt technically true, but still does not mean that the racing interests will be unaffected. In the first place, one would assume that the Sheikh has a significant portion of his personal fortune invested in Dubai World. Even if this is not true, there could be public and investor pressure for him to show some “sharing of the pain” by cutting back on lavish spending, including bloodstock expenditures at public auctions and extraordinary purses at the Dubai World Cup competition. What’s more, the debt crisis is likely to result in a lowered standard of living for his subjects, which should be a governor on ostentatious consumption by the ruler. Finally, the federal government of the UAE may stipulate restrictions in return for the bailout.

It is easy to counsel the bloodstock and racing industry to diversify and expand its owner base so as to reduce its reliance on Sheikh Mohammed. That, of course, is difficult to achieve. I once served on the board of a Nasdaq-listed company whose biggest customer was Home Depot. It takes a lot of average companies to hedge the risks of losing such a behemoth as Home Depot. Similarly, the Thoroughbred Owners and Breeders Association would have to recruit a multitude of wealthy new owners to compensate for a giant cutback in spending by Darley.

Immense Entrepreneurial Risk-Taking. Sheikh Mohammed is to be commended for endeavoring to diversify the economy of Dubai in anticipation of the day when oil revenues ebb. In the long run, his subjects would be better off by not being oil dependent. However, Dubai appears to have attempted to grow too much too fast. As a result, since 2008, residential real estate prices have fallen by 50% and 41% of commercial space is vacant. Unfortunately, the Sheikh’s ambitious vision was implemented, with a mountain of debt, at almost precisely the same that the world economy plunged. Consider the expanse of the projects undertaken by Dubai World:

“Its portfolio comprises some of the world’s best known companies and a number of outstanding projects. This includes DP World, one of the largest marine terminal operators in the world; Drydocks World & Dubai Maritime City designed to turn Dubai into a major ship-building and maritime hub; Economic Zones World which operates several free zones around the world including Jafza and TechnoPark in Dubai; Nakheel the property developer behind iconic projects such as The Palm Islands and The World among others; Limitless the international real estate master planner with current development projects in various parts of the world; Leisurecorp a global sports and leisure investment group, reshaping the industry by unlocking value across investment, development and brand opportunities; Dubai World Africa which oversees the regional development and portfolio of investments in the African continent.; and Istithmar World, the group’s investment arm that has a global footprint in finance, capital, leisure, aviation and various other business ventures.” (Source: Dubai World website.)

The Sheikh’s intent for his people was correct and his vision was bold. His timing was bad, but then, no one sees the future. Perhaps Dubai’s debt problems will turn out to be a detour to the future rather than a dead end. The bloodstock industry has a lot riding on the outcome.  Dubai World’s motto is “The Sun Never Sets on Dubai World.”  Let’s hope not for the sake of bloodstock and racing enterprises worldwide.

Copyright © 2009 Horse Racing Business

Comments

  1. Great read, Bill. Add Ireland bloodstock industry woes to the mix, and I have a hunch it will be a long time between sightings of Green Monkeys.

  2. Bill Shanklin says

    This article on the Dubai debt crisis was posted on December 5. Two days later it is already one of the two most accessed topics on the Horse Racing Business website during 2009. To say the least, the fate of Dubai is a subject of great concern in the bloodstock and racing world.

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