Monday, December 14, 2009

Classic example of "Have one's cake and eat it too"

To look for an example of "Have one's cake and eat it too", look no further than the recent Dubai World's shock announcement of a possible bond default, which was adverted with the intervention of Abu Dhabi.

Why classic example? Reason is very simple. The Dubai government owns 100% of Dubai World, but they come out to say that they are not responsible for the debts incurred by Dubai World

Personally, I believe that from the corporate point of view, there's nothing wrong with this statement. Dubai World is a separate entity from the Dubai government, and it has its own board. However, the problem lies that rating agencies may also decide the credit ratings of a company based on who owns it.

When you have such cases where the government outright disowns the problems plaguing the Government Linked Companies (GLC), it shows that the credit ratings for such companies have to be discounted and frequently reviewed as the rating agencies will then need to look at the viability of the projects being done and the make-up of the board of directors.

I believe that was also why Abdu Dhabi stepped in to help. Just imagine that if Abu Dhabi allows the default to happen, basically all credibility will be lost for ALL Arab companies. Rating agencies will most probably do a mass downgrade of credit ratings, thereby driving up borrowing costs for every single GLC, which may not even be restricted to the Arab world.

However, Dubai has made the mistake of announcing this intention and the damage has been done. Soon, I believe rating agencies will need to re-evaluate how they assign credit ratings to GLC since there has been proof of governments disowning their GLCs.

I believe Dubai World is going to have a diarrhea soon.


Ghost said...

Sorry but I disagree totally with you that there's nothing wrong with the statement, even from a corporate point of view. When things were going well, the government of Dubai and Dubai World were one and the same. They made no attempt to separate themselves from each other, and you can even say they made sure they left an "idea" on people that they are one of the same. Now things hit the fan, and suddenly they are separate? The only reason countries in the Gulf accept it is because they fear a Dubai default, however it still stink to high heaven

chantc said...

Based on my understanding, Dubai World is a corporation. Owners of a corporation have limited liability to the debts of the corporation because they are separate entities.

Therefore, if the corporation owns others money, it does not equate to the owner being totally liable. This only happens in sole proprietorship and partnerships.

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