Something big unfolded on my trip to Frankfurt last week.
It began with meetings in Germany over natural gas prices. They morphed into a discussion on how government subsidies affect energy prices. Our conversation turned to a recent IMF report that criticized taxes on energy - specifically pre-tax concessions - those provided by governments to producers in oil exporting countries.
That led four of us to drop everything in Germany and fly to Dubai, so we could hash out the matter firsthand with some of the folks responsible for those tax benefits.
What we learned there could change everything in the global energy markets and have huge consequences for energy investors around the world.
Remember, you heard it here first…
Dubai
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Why I Cancelled Everything in Germany and Took the Next Flight to Dubai
Dubai World Plans Debt Restructuring With $9.5 Billion Government Infusion
The Dubai government today (Thursday) announced plans to inject about $9.5 billion into state-owned holding company Dubai World to restructure its debt.
The additional funds double to $20 billion the amount the government will pay to the emirate's holding company. Dubai World is seeking to renegotiate $23.5 billion in debt with creditors. The company said it owed $14.2 billion to lenders other than the government at the end of 2009. The government asked creditors to wait eight years to get all their money back.
Dubai World, and its real-estate development arms, in November shocked investors when it announced it would seek to delay repaying its debt until May. The announcement sent developing-nation stocks plummeting and doubled the cost of buying insurance against a default.
Dubai, the second largest of seven states that make up the United Arab Emirates, and its state-owned companies ran up $80 billion in debt through 2008 to transform the sheikhdom into a tourism, trade and financial hub.
The additional funds double to $20 billion the amount the government will pay to the emirate's holding company. Dubai World is seeking to renegotiate $23.5 billion in debt with creditors. The company said it owed $14.2 billion to lenders other than the government at the end of 2009. The government asked creditors to wait eight years to get all their money back.
Dubai World, and its real-estate development arms, in November shocked investors when it announced it would seek to delay repaying its debt until May. The announcement sent developing-nation stocks plummeting and doubled the cost of buying insurance against a default.
Dubai, the second largest of seven states that make up the United Arab Emirates, and its state-owned companies ran up $80 billion in debt through 2008 to transform the sheikhdom into a tourism, trade and financial hub.
What's In Store for U.S. Stocks in Light of Greece's Tragedy?
The recent month of February was quite interesting for U.S. stocks, because while the Dow Jones Industrial Average rose 2.6%, it didn't exactly take a direct route to those gains: There were eight separate triple-digit moves in the Dow, both up and down.
At the root of that volatility were political and economic developments that challenged the rationale for the huge rally out of the March 2009 low. Bulls were basically rethinking their beliefs that the home-price plunge had abated, employment was on the verge of a big turnaround, governments could cut taxes and boost spending without end, and that interest rates would remain at zero for years.
I had prepared subscribers for much of this turmoil. Back in early November, I highlighted signs of trouble in the market for government debt well before the troubles in Dubai and Greece came to a head. In December, we started a dialogue on what to expect as the U.S. Federal Reserve withdrew liquidity from the economy and lifted interest rates. The upshot was a series of letters detailing why you should expect the first nine months of the year to trade flattish with a lot of volatility.
At the root of that volatility were political and economic developments that challenged the rationale for the huge rally out of the March 2009 low. Bulls were basically rethinking their beliefs that the home-price plunge had abated, employment was on the verge of a big turnaround, governments could cut taxes and boost spending without end, and that interest rates would remain at zero for years.
I had prepared subscribers for much of this turmoil. Back in early November, I highlighted signs of trouble in the market for government debt well before the troubles in Dubai and Greece came to a head. In December, we started a dialogue on what to expect as the U.S. Federal Reserve withdrew liquidity from the economy and lifted interest rates. The upshot was a series of letters detailing why you should expect the first nine months of the year to trade flattish with a lot of volatility.
Dubai World May Ask Banks to Take 20% "Haircut," Delay Payments to Solve its Debt Bomb
Dubai World may ask banks to take a so-called 20% "haircut" from the face values on their loans and stretch out loan maturities when it presents a restructuring plan this month. The banks may be able to avoid the haircut if they allow the state-owned investment firm to stretch payments for as long as 10 […]
Investment News Briefs
With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.
Kraft Raises Cash Bid for Cadbury; Google Phone Sales Begin; Automakers See Strong U.S. Sales Gains; Whitney Slashes Goldman Forecast; Gulf Infrastructure Gets a Boost; Construction Collapse; IT Obstacle
Kraft Raises Cash Bid for Cadbury; Google Phone Sales Begin; Automakers See Strong U.S. Sales Gains; Whitney Slashes Goldman Forecast; Gulf Infrastructure Gets a Boost; Construction Collapse; IT Obstacle
- Kraft Foods Inc. (NYSE: KFT) has agreed to sell its DiGiorno and Tombstone pizza brands to Nestle SA (OTC ADR: NSRGY) for $3.7 billion, using all the net proceeds from the sale to boost the cash portion of its offer for Cadbury PLC (NYSE ADR: CBY) . In related news, Warren Buffet's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) voted against Kraft's offer to issue up to 370 million shares for the Cadbury acquisition, saying it would change its vote if the transaction doesn't "destroy value for Kraft shareholders." Berkshire's stake of more than 9% in Kraft makes it the food maker's largest shareholder. Nestle, meanwhile, formally took its name out of the running of any possible bidders for Cadbury in a terse statement.
$10 Billion Bailout Just Beginning of Dubai's Debt Problems
When Abu Dhabi agreed on Monday to provide Dubai with $10 billion to settle some of its debt obligations, it may have temporarily soothed the concerns of major creditors. But the bailout, and a separate move to set out a legal framework for further debt restructuring, won't do much to relieve Dubai's long-term debt problems.
Plenty of questions remain as Dubai works to repair its reputation and tries to renegotiate the rest of its debts. The full extent of its liabilities is uncertain, but Dubai's known debts are roughly equal to its total economic output last year, with some analysts estimating its total obligations at $100 billion or more, Bloomberg News reported.
"It's not going to stop and go away," John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, Saudi Arabia told Bloomberg. "There's still debt that needs to be settled in 2010 and 2011."
Plenty of questions remain as Dubai works to repair its reputation and tries to renegotiate the rest of its debts. The full extent of its liabilities is uncertain, but Dubai's known debts are roughly equal to its total economic output last year, with some analysts estimating its total obligations at $100 billion or more, Bloomberg News reported.
"It's not going to stop and go away," John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, Saudi Arabia told Bloomberg. "There's still debt that needs to be settled in 2010 and 2011."
Investment News Briefs
With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.
Dubai Gets $10 Billion Bailout; Citi Unveils First TARP Payback Plan; Cadbury Formally Rejects Kraft Offer; British Airways Cabin Crews to Stage Holiday Strike; Obama to Banks: Help the Economy Recover; Online Shopping Grows 3% Over 2008; Chinese Automaker Buys Saab Platform Technology; Toyota to Release Plug-In Hybrid in 2011
Dubai Gets $10 Billion Bailout; Citi Unveils First TARP Payback Plan; Cadbury Formally Rejects Kraft Offer; British Airways Cabin Crews to Stage Holiday Strike; Obama to Banks: Help the Economy Recover; Online Shopping Grows 3% Over 2008; Chinese Automaker Buys Saab Platform Technology; Toyota to Release Plug-In Hybrid in 2011
- Debt-laden Dubai got a $10 billion bailout from neighboring Abu Dhabi, boosting global markets but raising questions about the undisclosed terms of the deal, Reuters reported. The fund will enable state-owned investment vehicle Dubai World to repay a $4.1 billion bond its real estate developer Nakheel PJSC was due to honor yesterday (Monday). Despite the bailout, credit ratings agency Fitch Ratings Inc. called Abu Dhabi's support only " a tactical step to permit an orderly restructuring of obligations within Dubai to continue."
- Citigroup Inc. (NYSE: C) formally laid out its plans to repay $20 billion in Troubled Asset Relief Program (TARP) loans, which includes selling about $17 billion in common stock and about $3.5 billion of securities that turn into common shares. The TARP payback leaves Citi with a balance of roughly $15 billion, meaning it is still under the U.S. government's thumb. "They're still in the government's embrace. It's just not a bear hug now," Anton Schutz, president of Mendon Capital Advisors Corp., which owns Citi shares, told Reuters .
- Cadbury PLC's (NYSE ADR: CBY) board of directors unanimously rejected Kraft Foods Inc.'s (NYSE: KFT) $16.2 billion bid, calling it "wholly inadequate." While no competing offers have materialized yet, Cadbury has "had indications of interest from third parties on possible business combinations," Chief Executive Officer Todd Stitzer said in a conference call, declining to name any companies. The Hershey Co. (NYSE: HSY) as well as Nestle SA (PINK ADR: NSRGY) have been reported as potential competing suitors, but unless a company comes forward with a bid, Cadbury's shareholders - which have until Feb. 2 to approve or reject Kraft's bid - may green light Kraft's offer. "We're not overwhelmed by Cadbury's defense…This is not enough to squeeze a massively higher offer from Kraft in our view," James Edwardes Jones, an analyst at British broker Execution Ltd.told Reuters. "It is difficult to see why Kraft needs to pay up much more than 800 [pence]." Kraft's bid is about 727 pence per Cadbury share, and most analysts believe it needs to pay 820-850 pence to buy Cadbury.
Dubai Debt Fiasco Could Weigh on U.S. Banks
A potential default by Dubai on debt payments could have a ripple effect on U.S. banks and the still-gloomy commercial real estate industry, some analysts say.
Citigroup Inc. (NYSE: C) has $1.9 billion invested in the nation's state-owned investment vehicle Dubai World, JPMorgan Chase & Co. (NYSE: JPM) said in a research note.
While not directly affecting Citi or other major U.S. banks, the indirect effects could be more crippling on a broader scale, Rochdale Securities analyst Dick Bove told CNNMoney.
"There could be huge indirect exposure," Bove said. "One has to assume that U.S. banks will be hurt."
Citigroup Inc. (NYSE: C) has $1.9 billion invested in the nation's state-owned investment vehicle Dubai World, JPMorgan Chase & Co. (NYSE: JPM) said in a research note.
While not directly affecting Citi or other major U.S. banks, the indirect effects could be more crippling on a broader scale, Rochdale Securities analyst Dick Bove told CNNMoney.
"There could be huge indirect exposure," Bove said. "One has to assume that U.S. banks will be hurt."
Is Government Debt the Next Crisis to Strike?
While American investors were busy enjoying their Thanksgiving dinners, global markets were shaken by word that Dubai asked for a payment holiday on the $59 billion it owes via its investment vehicle, Dubai World. The move, which comes as oversized bets on Persian Gulf real estate sour, was considered a default by the major rating […]
Dubai: More Bubble or More Boom? Time Will Quickly Tell
By Martin HutchinsonContributing Editor Dubai has plenty of qualities that catch an investor’s eye. The emirate has the world’s only (self-proclaimed) 7-star hotel. Dubai also is home to the biggest financial market in the Middle East, which is itself publicly quoted and trades at 25 times forecast 2008 earnings. It has been enjoying one of […]
A View From the Burj: Dubai's Economy Fueled by High-Powered Government Investing
By Mike Caggeso Associate Editor When flocks of tourists gaze from the top of the world's tallest building – the colossal Burj Dubai, slated to be completed in 2009 – they'll see a swath of construction cranes dotting the skyline and dozens of tankers awaiting arrival/departure from the world's largest man-made harbor. To the southwest, […]
Dubai's Shiekh Mohammed 'Ponying' up $400 Million for Another Huge Investment
By Mike Caggeso Associate Editor Dubai has chalked up a string of foreign investments in the past year – mostly through its state-owned investment vehicles, or sovereign wealth funds. The government's most recent investments include: a $448 million stake in a Malaysian super city; $1.26 billion in hedge fund Och-Ziff Capital Management Group LLC's (OZM) […]
Dubai World Opens Wallet to Help Build Malaysian Super City
By Mike Caggeso Associate Editor Dubai World's worldwide holdings got another boost yesterday (Thursday), as its subsidiary, Limitless Holdings Pte, agreed to form a joint venture with UEM World Bhd. that will build $448 million (1.5 billion ringgit) in luxury homes in Malaysia's Johor province. The housing project will be built in a special zone […]
Qatar Angles to Undermine Rival Middle East Cash Baron Dubai
By Keith Fitz-Gerald Investment Director, Money Morning In the race to buy global assets, Dubai seems unstoppable. After all, in the past few months they've spent billions on all sorts of global industries. In May, DIFC Investments, a subsidiary of Dubai International Financial Centre, invested $2 billion in Deutsche Bank AG (FRA:DBK), Germany's largest public […]
Dubai Ports World's Record IPO
From Staff Reports Dubai's ambitions to become the leading financial hub of the Middle East got yet another lift last week when the initial public offering of Dubai Ports World raised nearly $5 billion, making it the biggest IPO ever in the region. Strong demand for the port operator's shares – priced at the top […]