Abu Dhabi throws Dubai a lifeline, terms uncertain

RELATED NEWS Dubai to create bankruptcy framework, Dubai World may use Abu Dhabi gives $10 bn to Dubai, repays Nakheel bond

Abu Dhabi threw its flashy but debt-laden neighbour Dubai a USD10 billion lifeline to head off a bond default, cheering Gulf and global markets on Monday but raising questions about the undisclosed terms.

The surprise rescue enables Dubai World to repay a USD4.1 billion Islamic bond its property developer unit Nakheel was due to honour on Monday.

The cost of insuring Dubai's debt against default fell sharply on the news and the stock market in the glitzy emirate rose 10.4 percent, its biggest one-day gain in 14 months. Shares in Abu Dhabi, Saudi Arabia and Qatar also recovered on relief that an immediate crisis had been averted.

The bailout marked a spectacular double policy shift. Dubai last month declined responsibility for Dubai World's debts, and conservative Abu Dhabi, which produces 90 percent of the United Arab Emirates' oil exports, had given no hint that it would ride to the flamboyant business hub's rescue.

However, credit ratings agency Fitch Ratings said Abu Dhabi's support was only "a tactical step to permit an orderly restructuring of obligations within Dubai to continue".

A Dubai government statement said the remaining USD5.9 billion not used to pay the Nakheel bondholders would support Dubai World until the end of April next year.

But the conglomerate at the centre of a USD26 billion debt storm still needs creditors to agree a standstill and a massive restructuring in order to get that financial support to cover working capital and interest expenses.

Statements from Nakheel and the Dubai government indicated the Nakheel bondholders would be paid unconditionally. However a Dubai government source made clear other lenders would only receive interest payments if they agreed to the debt standstill.

Analysts said the emirate's troubles were far from over, and they questioned a statement by a Dubai government source that there were no conditions on the loan beyond the debt standstill.

"We've still got USD35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing," said Saud Masud at UBS. "The big question is how are they are going to do this next step?"