Friday, November 27, 2009

MGM Mirage Sez Dubai Debt Crisis Won't Hit City Center

After being closed yesterday, US stocks fell in reaction to the Dubai debt crisis (catching up with the rest of the world's jitters over the Dubai World's request for a six month reprieve from debt repayments). Still, analysts and MidEast financial experts aren't too freaked out.

This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said. “But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”

Traders were also reacting to what might be, analysts said, given that the actual exposure of banks to the Duba debt is still unknown.

“Dubai is really a symptom, a legacy, from the previous boom, rather than symptomatic of a start of a whole new set of issues that are going to create a systemic crisis in emerging markets,” Kevin Grice, senior international economist at Capital Economics in London, said. “Markets assume the worst-case scenario.”

The uncertainty in Dubai did not suggest a coming collapse of the global real estate market, Mr. Grice said. [...]

Paul Schulte, head of multi-strategy research at Nomura in Hong Kong, commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”

Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn.

When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors, especially oil-rich Abu Dhabi — or so investors had assumed.

“Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far,” Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday. “I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”

But what about Las Vegas? Remember, after all, that City Center is 50% owned by Dubai World. However so far City Center's other 50% owner, MGM Mirage, is reassuring investors that the newest resort to grace The Las Vegas Strip will still open on schedule and won't be affected by Dubai World's massive debt.

Casino operator MGM Mirage said Friday that its CityCenter joint venture with Dubai World, the investment arm of the Dubai government, is not affected by Dubai World's request to delay repaying billions in debt and will still open on time.

Dubai World, which has about $60 billion in debt, said Wednesday it asked creditors if it could postpone forthcoming payments until at least May.

The news revived worries about bad debt and sparked concerns of a ripple effect around the global financial system. World markets dropped on Thursday when Wall Street was closed for the Thanksgiving holiday.

MGM representative Yvette Monet said in a statement that the joint venture is unaffected by Dubai World's announcement.

"CityCenter is fully funded, on schedule and ready to begin welcoming guests starting next week," Monet said.

CityCenter is an $8.5 billion casino complex in Las Vegas that is half-owned by Dubai World. The 67-acre development of plush resorts, condominiums, a retail mall and one casino on the Las Vegas Strip will start opening in phases on Tuesday.

Overall, I'm not too scared. As big as Dubai has become, this isn't the equivalent of our economy nearly crashing and burning last fall. The global economy will survive this.

However since City Center is directly affected by this, it may be a little rockier here. I still think all the City Center resorts will open on time, but I won't be too surprised if Dubai World soon looks to sell its 50% stake, or at least declines to invest any more in this project. It's too bad MGM Mirage can't buy the other 50% of City Center, since they themselves are still over-leveraged with way too much debt.

Again, I'm cautiously optimistic that City Center will open and survive this storm. I just have a feeling that this may be the last time we see investors go in way over their heads in debt to finance massive construction projects.

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