Standard Chartered and Dubai World The lending problem - Essay Example

Standard Chartered and Dubai World The lending problem Contents Standard Chartered and Dubai World The lending problem Contents 2 Introduction 3 Standard Chartered Bank 3 Dubai World 4 Lending Problem 4 Possible Solutions 5 Conclusion 7 Reference 8 Introduction The financial recession affected the whole world, which has started from the United States due to the housing bubble. The leading banks of the United States like the Lehmann Brothers have provided housing loan to the people who were not enough credit worthy. As a result, they defaulted and the banks have declared themselves bankrupted. As the financial institutions of the country had to face financial problem, the economic conditions of the country has deteriorated. In the era of globalization, when the economy of a country is related to the other; then the deteriorating economic conditions in a country also affects the economic conditions of other country. It has happened in the case of 2007-09 financial crisis also. The economic condition of the most powerful economy, the United States, affects the economic condition of the whole world. The stock market indices all over the world became down. Country like Japan, where the economy is mainly dependent on exports and investing in other markets, broke down. It has also happened for the companies of the Middle East. The financial companies of the Middle East have to take loans for their business. Due to the economic crisis, they have found problem to repay the loans. Dubai world is an investment company, which has taken loan and found it tough to repay the loan. This paper is an analysis of the lending problem of Dubai world and the role of Standard Chartered Bank. There will be some possible solutions of the problem and the solution, which has used to solve the problem. Standard Chartered Bank Standard Chartered Plc is a financial services company, which operates in more than 70 countries around the world. The headquarter of the bank in London, the United Kingdom. The company has entered different countries through the joint venture, subsidiaries etc. The operation of the company is diversified as it offers operations in consumer banking, institutional banking and corporate banking also. Standard Chartered is listed in the London Stock Exchange; also it is the constituent of the FTSE 100 index. The company is also diversified globally as it offers services all the continents of the world. 90% of the revenue of the company comes from Middle East and other Asian countries and Africa. The bank offers a diversified range of products including mortgage loans, investment banking, wealth management, corporate banking, wealth management services etc (Standard Chartered, 2012). Dubai World is among one of the main clients of Standard Chartered Bank. The investment company has faced credit crisis in the time of the financial recession and the main creditor of the company was Standard Chartered bank. The geographical presence of the company minimizes their risk. In a globalized world where the multinational companies have to face different political conditions, economical conditions in different countries, then only diversification can minimize the risk of the portfolio of the company. In the time of financial crisis of 2007-09, when all the markets throughout the world has broken, then the diversification helped the company to manage the situation. They are able to tackle the situation, which happened because of the failure of repayment of loans of the Dubai World. Dubai World Dubai World is an investment company, which manages the projects and certain businesses of the government of Dubai. The company has vast importance in the economy of Dubai from a global perspective. The company promotes Dubai as a trading and commerce hub. The company was established in the year 2006. The company manages a vast type of companies including the DP world (the port operator is third largest in the world), Leisurecorp, P&O Meritime, Nakheel which develop residential projects etc. The aim of the company is to maximize the shareholders’ wealth and to make their investment portfolio less risky. Lending Problem In the time of global financial crisis, the market of Dubai has also come under problem. The real estate market of Dubai has declined after a rise for continuous six years. The debt size of Dubai World has $59 Billion. The portfolio of the company was wide, but the all stock markets over the world have felt sharply. There was severe liquidity crunch in the market; the unemployment rate was high. The oil prices also have felt. Because of all these events, Dubai world found the problem to repay the loans. They have asked for delaying $26 billion debt, which increases the speculation that the financial services companies may declare themselves default. The credit rating agencies also downgraded the ratings of the company. As a result, the investors all over the world have lost their confidence in the company, which is one of the largest financial services company in the world. Moreover, the government of Dubai has not guaranteed the investors to pay their debts, which also decreases the confidence of the investors all over the world. The financial condition of the company is the matter of interest of the investors from various countries of the world, as the company has investment in several large companies from different sectors and different countries of the world. Along with this it is also a fact that the company managed the projects and business of the government of Dubai, but the government has declined to take the guarantee of the debt of the company, which increases the speculation that the company will get bankrupted and the shareholders of the company is going to make loss from their investments. Moody has downgraded the rating of the company, which means that the affiliated agencies of the company have lost the status of gradation in investment. Because of the debt problem of Dubai, which is concerned as the flag bearer of the Middle East, the problems get deep in all over the world. Due to the failure of repayment their loans on the stipulated date, the investor feared about the global markets and the stock indices declined. The Dow Jones Industrial Average Index fell of 233 points, when the market of London was not so hampered. The investors of London stock exchange thought that the invested amount is not so much that can hamper the global financial markets. However, the effect was much for the creditors of the Dubai World. The situation was worst for the shareholders of the company and the creditors. Dubai world has declared them to unable to repay the amount in the pre-determined date and the government of Dubai has declined to take the guarantee to repay the debt of the company. Standard Chartered bank was the biggest lender of Dubai world. So it is a matter of concern for them as the amount was huge, which they have credited to Dubai world. If they become unable to get that $117 Million amount, which they have provided to Dubai world, their global operation may got hampered. They cannot invest their money in the other areas of their business and because of this large debt, there is a chance to be an event like the Lehmann Brothers. In this situation, there needs a solution so that the company may be able to repay their debt in the future, so that the creditors of the company get back their money and the financial condition of the country and the world become stable. Possible Solutions As the large debt of the company and their failure to repay that amount on the stipulated date has created problem for the financial condition of the whole world so there was the situation when the company management and the creditors of the company needs to make a solution for the problem. The company cannot pay the debt to the creditors as they have shortage of debt. So they have to find some process through which they can arrange the funds and pay it. For repayment of the debt, the company management can sell a part of the assets, which is a relatively easier process for the company management. The company management can take the decision to sell the assets, which are of high value in the market, which in turn collect funds for the company management and they become able to repay their loans (Sloman, 2006, p.484). The company also can issue the securities in the market, which would be a good process to collect funds. However, the company has recently declared that they were unable to pay their loan amount on the stipulated date. This raises the question about the efficiency of the company management. In this situation, the investors may not be interested for the securities of the company. Rather it would be preferable for the company management to arrange the funds from the other areas. The fund collection through the sell of the high value assets is better than issue the securities in the market as it is a quick way than the latter. However, there is the chance to get the underestimated value as the company had huge debt burden, also there is the chance that the foreign companies can buy the high value assets of Dubai World and they have the intention to control the company, which is the flag bearer of trading and commerce of Dubai. In addition, the company would have fewer assets for the future. May be they can face the situation by sale of the assets, but they would have less assets in future and with that assets their productivity will be decrease in the future. The company can take the process of debt securitisation, for controlling the situation. The company can sell their debt to other companies, through which their liability would decrease. Through the process, the management can improve their asset liability balance and can get a way out from this situation. The step can improve the liquidity for the company management and they can use this increased liquidity for improving the business (Gomez, 2008, p.450). However, this process is not assuring complete risk avoidance; also, this can be costly to the company management. As they have failed to repay the loan on the pre-determined date, they find it difficult to sell their debt as the reputation of the company has hampered for the event. Conclusion In the year 2007, the financial crisis affected the global economy. The Middle East has also affected due to the crisis. Dubai World is a financial services company, which is one of the main companies of the Middle East. Due to the financial crisis, the company has a burden of huge debt. In the year 2009, they have declared that they were unable to repay the amount of loan on a stipulated time. Standard Chartered was the main creditor of the company. They have issued loans of $117 million to the company, which is the largest among the entire amount, which the company has collected from a total 70 banks. If the company become unable to pay the loan amount, then Standard Chartered also had to face problem, their global operation may get affected. In that situation, a policy needed which would help the company management to get out of this situation. Analyzing the situation, the researchers have provided some possible solutions. Each of these has some pros and cons. Taking all the positives and negatives it has decided by the company management that the main need is of fund, through this fund they would become able to repay that amount. The company has taken the policy of debt restructuring to face the crisis. On March 2010, Dubai World has struck a deal for debt restructuring. Debt restructuring means to convert the debt type in some other type (Kolb, 2011, p.169). The situation is favourable for the debt holders. Abu Dhabi has provided Dubai World $10 billion to get out from this situation. The government debt of $8.9 Billion has converted into equity. The company has to pay the remaining amount to the creditor within 5 to 8 years. The nominal interest of the amount was fixed in 1% per annum. This bailout package by Abu Dhabi has made easier the condition for Dubai World. They have got more time to pay the debt and of lesser amount than the previous. Reference Standard Chartered 2012. Banking Services. [Online]. Available at: http://www.standardchartered.com/en/banking-services/index.html. [Accessed: 17 March, 2012]. Sloman, J.,2006. Economics. 6th ed. India: Pearson Education India. Gomez,C., 2008. Financial Markets, Institutions and Financial Services. India: PHI Learning Pvt. Ltd. Kolb, R., 2011. Sovereign Debt: From Safety to Default. United States of America: John Wiley & Sons. Read More