Abu Dhabi gives $10 billion to help Dubai World pay debts

Nakheel, a Dubai World unit, confirms it will honor its sukuk obligations

FRANKFURT (MarketWatch) -- Abu Dhabi has given fellow emirate Dubai $10 billion in financing that will be used to pay part of the debt held by state-owned conglomerate Dubai World and its property unit Nakheel.

The news sparked a rally in Dubai stocks, which surged over 10% Monday. European stock markets also posted gains, led by banking shares. Equity markets in Hong Kong, Shanghai and Sydney all reversed direction to finish higher following the Dubai news. See full story on Asian stock rebound. See European markets report.

Dubai announced Monday that Abu Dhabi's government has provided $10 billion to the Dubai Financial Support Fund. Of the total, $4.1 billion will be used to repay Nakheel's Islamic bond maturing Monday, while the rest will be used to finance Dubai World's obligations through the end of April 2010.

"We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices," Dubai Supreme Fiscal Committee Chairman Sheikh Ahmed bin Saaed al-Maktoum said in a statement.

Financial markets around the globe have been jittery about Dubai debt exposure since late last month, when Dubai World sought to restructure $26 billion of debt. The conglomerate's total obligations are estimated at roughly $60 billion.

Monday's announcement is helping clear up some of the uncertainty around the restructuring of Dubai World's debt and will likely boost investor confidence, since it demonstrates Abu Dhabi's willingness to support its fellow emirate.

Implications for investors

"This lifeline should dispel the near-term crisis of confidence of the past two weeks and [it] greatly reduces immediate credit risks associated with Dubai World," said Ahmet Akarli, strategist at Goldman Sachs, in a note to clients.

"It is important to note that this is only the beginning of a comprehensive financial realignment process which may involve asset sales, debt restructuring and liquidation of insolvent entities," Akarli said. "It is clear additional aid from the UAE will be needed to smooth the restructuring process out."

Tim Brunne, strategist at UniCredit Group in Munich, warned that the "the whole story leaves a bitter taste."

"The reputational damage for Dubai World is enormous, as its failed timely communication of its fiscal problems will alienate investors," Brunne said in a note.

The central bank of the United Arab Emirates, which governs monetary policy in Dubai, Abu Dhabi and other U.A.E. constituents, "is also prepared to provide support to local UAE banks," according to Dubai's statement.

The government of Dubai also plans to announce a "comprehensive reorganization law," based on internationally accepted standards for transparency and creditor protection.

"This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations," the statement said.

Also, Dubai's government expressed commitment to its obligations as well as confidence in its economic model and the long-term health of its economy.

Separately, Nakheel confirmed Monday it will honor all obligations related to its sukuk using funds that will be provided by the Dubai Financial Support Fund.

"In accordance with the terms of the sukuk, the repayment will occur within the next 14 days," Nakheel said in a statement posted on Nasdaq Dubai.

Dubai stocks rally

The benchmark DFM index rallied 10.4% to end at 1,871 points on the Dubai Financial Market.

Shares of real-estate developer Emaar Properties soared 15%, while those of contracting firm Drake & Scull International gained 14.5%. Aramex, a company that offers freight, express and logistics services, rose 14.7%.

Shares of discount airline AirArabia ended up 14.6%. Dubai Financial Market rose 14.8% and Dubai Islamic Bank gained 14.6%.

Shares of DP World /quotes/comstock/11i!dpwrf (DPWRF 0.40, -0.04, -9.09%) , a marine terminal operator that's a unit of Dubai World, rose 14.2% on Nasdaq Dubai.

In Abu Dhabi, the benchmark stock index gained 7.9% to 2,820 points. Real estate and energy shares posted the biggest gains.

First Gulf Bank and Sorouh Real Estate both surged 10%.

Polya Lesova is reporter for MarketWatch, based in Frankfurt. Lisa Twaronite is a MarketWatch reporter based in Tokyo.