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December 1, 2009
Dubai's dilemma: a warning to NY
NY Post
by Nicole Gelinas
There's a vital lesson for New York in the travails of Dubai, the little Persian Gulf emirate with big buildings and bigger debts -- if only our politicians and taxpayers would understand.
Last week, Dubai's state-owned investment arm, Dubai World, told its banks (mostly British) that it needs a freeze on debt repayments. It also needs to cut the $60 billion that it borrowed to speculate on office towers, hotels, luxury retailers and the like.
Global bankers were shocked. The Dubai government doesn't legally back Dubai World's debts -- but investors had thought that two levels of bailout would protect them if Dubai World's projects failed. If the company's dubious investments ran into trouble, they figured, Dubai would bail them out. And if the Dubai government wouldn't or couldn't do so, then Abu Dhabi (the richest of the seven United Arab Emirates) would step in, so as not to make all the emirates look bad.
...Pay attention, New York: Albany and New York City have their own "Dubai Worlds" -- state-owned entities that borrow buckets of money to invest in oft-dubious projects without the "official" backing of taxpayers.
...The most recent example is Atlantic Yards, the $4.9 billion basketball arena and luxury-apartment project in Brooklyn. By December, developer Bruce Ratner must raise the arena's first bonds, $800 million approved by the Empire State Development Corp. The debt supposedly comes without a government guarantee: If revenues from luxury-box sales and such don't cover the debt, bondholders lose.
But if lenders believed that, Ratner probably couldn't borrow at a price he could afford for this project -- a luxury stadium for a losing team. Plus, there are no comparable deals that investors can look at to see what they should charge, and no one knows what demand for luxury boxes will be like in half a decade.
So anyone buying Ratner's bonds is likely counting on Atlantic Yards being "too big to fail." And Empire State Development Corp. officials play along. "I don't know if I'd characterize [the state] as willing [to let Atlantic Yards' bonds default]," ESDC lawyer Jonathan Beyer said last week. "It's just that the documents do not require us to make any payments."
...The best antidote for the most questionable spending would be some market discipline: Warn bondholders that they'll suffer if they put their money in a white-elephant project or in an authority that can't control its spending.
Related coverage...
NY Fiscal Watch, Dubai dribble
By the way, Empire State Development (ESDC) absorbed the Urban Development Corp., whose February 1975 default helped precipitate the state and city fiscal crisis of the 1970s. Governor Hugh Carey and the Legislature then felt compelled to appropriate roughly $200 million (the quivalent of $800 million in today’s terms) to complete unfinished UDC projects and prop up the authority until it could re-enter the debt markets a couple of years later.
Speaking of losing, the New Jersey Nets–the team Ratner wants to put in the Brooklyn arena–just fired its coach and tied an NBA record for futility by losing its first 17 games of the season. Ratner is in the process of selling a controlling interest in the Nets, along with a large share of the Atlantic Yards arena, to a Russian tycoon known as the “bachelor billionaire,” who appears to have made his fortune in precious metals.
Luxury box, anyone?
Posted by eric at December 1, 2009 11:15 AM