Sunday, February 15, 2009

Dubai's Troubles and the Two-Year-Old Sales

Just when we thought the horse market couldn't get any worse, there's news that the economy of Dubai, whose ruler, Sheikh Mohammed, is also the world's most important thoroughbred buyer, has become the latest victim of the global economic crisis.  As the two-year-old sale season begins, there couldn't be worse news for prospective sellers.

The two-year-old sales start this coming Tuesday, with Ocala Breeders Sales Co.'s select sale, to be followed in short order by the rest of the select sales: Fasig-Tipton Calder on March 3rd, Barrett's in California on March 10th, OBS again on March 17-18, and Keeneland on April 6-7.

Already, the portents for the two-year-old market have been reflecting the gloomy economic climate.  The general consensus seems to be that prices will be off at least 30-40% from the peaks of recent years. As of Sunday morning, 22 of the 200 horses in the sale catalog had been scratched, most before they even took to the track for Frday's breeze show.  If the fall and winter breeding stock and mixed sales-- where prices dropped by 40-50% and more --  are any indication, there will be lots more scratches and lots of "reserve-not-attained" (RNA) results when the auction does get underway.

Most of the horses offered at the select two-year-old sales are being sold by "pinhookers," who purchase them as weanlings or yearlings, push them through a tough, unforgiving training regimen in Ocala over the winter, and then hope to hit a home run selling to "end users," meaning people who actually want to race the horses.  At the yearling sales last year, before the full enormity of the financial crisis had become apparent, prices were off only about 20% from earlier years, so if the two-year-old sales do decline by 40% or more, the pinhookers will face a major cash squeeze.  That, in turn, will put downward pressure on yearling prices later in 2009, further fueling a vicious cycle, at least from thoroughbred breeders' point of view. 

Now, just to add to pinhookers' and breeders' worries, come reports that the economy of the Persian Gulf emirate of Dubai is in serious free-fall.  The New York Times recently reported that Dubai's boom years appear to be over: construction projects have been halted; foreign workers -- who make up as much as 90% of Dubai's 1.4 million population -- are being laid off and forced to leave the country; and real estate prices are falling rapidly (a leading bank predicts an eventual drop of 60% in property prices). Shares on the Dubai stock exchange have fallen farther than those in the US. You might remember DP World, which not so long ago was bidding to buy most US seaports. Now, shares in DP World, which were initially sold to the public at $1.30 a share just last October, were trading this mor ning at 23 cents. That drop reduces the market value of DP World from about $5 billion to less than $1 billion.  And you thought your 401(k) had been hit hard!

The reason all this matters for horse racing is that the economy of Dubai is inextricably linked with the personal fortune of its ruling family, headed by Sheikh Mohammed.  To take a single example:  The Dubai-based firm Synergy Investments Ltd. bought the Fasig-Tipton auction house last year, in a deal negotiated by Sheikh Mohammed's bloodstock adviser John Ferguson. News reports at the time described the CEO of Synergy, one Abdalla al Habbai, as a "close associate of Sheikh Mohammed." And, nine months later, that's still just about all we know about Mr. al Habbai's company.  A Google search turns up -- nothing. No financial reports, no stock exchange listings, not even a press release about anything other than the Fasig-Tipton deal. I've done a lot of investigating of companies around the world and have never found one that left as few fingerprints as Synergy Investments.  As for Mr al Habbai, a Google search shows that he's variously listed as a Director of the Noor Islamic Bank, as Chief executive of the Dubai Engineer's Office or as a Director of International Humanitarian City, a duty-free transit point for aid shipments in the Middle East. We can only presume, given Dubai's lack of financial transparency, that it's Sheikh Mohammed's money that went to buy up F-T. 

The full extent of Dubai's collapse is hard to determine, because of stringent government secrecy rules; a new draft law would make it a crime to damage the country's reputation or economy -- presumably by telling the truth -- and subject the offender to a fine of more than $250,000. But it's clear that the boom times are over. In fact, Reuters reports today that the complex of investment firms ultimately controlled by Dubai's ruler, Sheikh Mohammed, is in the midst of a major restructuring. The Sheikh's Dubai Holding, which has financed most of the spectacular construction in the Emirate, is cutting back, and Reuters reports that all the government-controlled firms in Dubai need to repay some $15 billion in loans this year, nearly as much as all the rest of the Persian Gulf states put together. Just this week, the Times reported that one of the investment funds controlled by the Sheikh had been denying that it plans to sell the luxury men's clothing chain Barney's, for which they paid almost $1 billion just two years ago. In the financial world, when you have to deny rumors like that, it probably means they're true.

And lots of Dubai's overseas investments have performed about as well as Vineyard Haven, the colt that Sheikh Mohammed bought from Bobby Frankel and Joe Torre last fall for a reported $12 million and took to Dubai, where the colt just ran an unthreatening 4th in the UAE 2,000 Guineas.  Just as Sheikh Mohammed has often overpaid for thoroughbreds, so Dubai's state enterprises seem to have overpaid for many of their acquisitions. For example, the state-controlled Dubai World paid $5.1 billion for a 10% ownership stake in MGM Mirage; those shares have since lost 80% of their value. Dubai's stake in Deutsch Bank is down 70%. And its luxury hotel chains are suffering from the global cutback in high-end travel, as is Emirates Airlines, also owned by a state entity. (For the Sovereign Wealth Fnd Institute's useful attempt to explain the complex of linked companies that invest Dubai's, and the Maktoum's, wealth, click here.) 

And even the bond-rating firm Moody's Investors Services, which was so friendly to US issuers of mortgage-backed securities long after the housing bubble burst, has concluded that Dubai's liabilities are growing much faster than its ability to pay them off. In fact, the Maktoums may, Bloomberg News reports, have to turn to neighboring Abu Dhabi for a bailout. Abu Dhabi has oil (8% of the world's reserves), and Dubai does not.

If things are as bad financially in Dubai as they now appear, it seems inevitable that the fallout will affect US racing, starting with this year's sales. While the Dubai royal family has bought only occasionally at the OBS two-year-old sales, it has been a major presence at the top end of Fasig-Tipton's Calder sale.  Last year, John Ferguson, acting for Sheikh Mohammed, bought five horses there for an average of $900,000.  The year before, Ferguson bought eight for an average of just under $800,000.  And, memorably in 2006, he engaged in the epic auction battle that pushed the price of The Green Monkey to a world-record $16 million, luckily for the Sheikh, as it turned out, letting Demi O'Byrne and the Coolmore interests win the battle.

And for many years, the Dubai royal family has been the single most important buyer at the Keenland September yearling sale.  Last year, they bought at least $36 million worth of yearlings; in 2007, about $27 million and in 2006 a stunning $76 million.

If the Maktoums were to scale back their involvement significantly, the top end of the US auction market would suffer severely. And the first test of whether that cutback is coming may well be in two weeks at the Fasig-Tipton Calder sale.  If Sheikh Mohammed isn't buying at a Fasig-Tipton sale, one where he practically owns the auction company, then it's unlikely he'll be buying in force at any of this year's sales.

A lot of pinhookers may suddenly be very interested in the news coming out of Dubai.

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