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With the most developed economy in the region and an extensive real estate sector, the UAE was always going to suffer more than its neighbours in the economic downturn. Within the country itself there is a consensus that the notoriously over-banked city of Dubai has been hardest hit....

With the most developed economy in the region and an extensive real estate sector, the UAE was always going to suffer more than its neighbours in the economic downturn. Within the country itself there is a consensus that the notoriously over-banked city of Dubai has been hardest hit.

"In Dubai the economy generally has been more battered." says one partner, and another agrees: "Dubai will be a consolidation picture for at least 12 months." The hard times have also raised the interesting question of insolvency. "In the UK, France etc, there is a history and case law for when big companies go under, that isn't there in Dubai," explains one partner. So far no UAE companies have been allowed to fail, but the precedent-setting moment cannot be far away.

A development that will interest investors is the government's decision to reject the proposal for a GCC (Gulf Co-operation Council) single currency, with the UAE central bank making it clear that the dirham will remain pegged to the US dollar for the foreseeable future.

In the banking sector at large, new lending transactions are significantly reduced. Firms find that any proposed deals involve more than one lender. "Large structured deals don't exist any more," says one lawyer, "deals that are being done are club deals." Another partner agrees: "International banks have pretty much shut-up shop on the corporate side; accessing any large amount of capital is a challenge."

In the Islamic finance sector the health of the market is more difficult to judge. "Because it's getting harder and harder to get liquidity, we're seeing more conventional Islamic deals," says one partner, while another adds: "You are seeing non-shariah-compliant investors looking at Islamic finance because it's the only type available."

However Islamic banks are not without their problems. "Most Islamic banks could not invest in traditional investments," explains one partner. "When everything fell through they claimed victory, but they invested in real estate which has now collapsed."

In the debt capital markets many firms find that they are advising over debt issued under the 144A rule, whereby securities can be sold and then immediately re-sold to Qualified Institutional Buyers (QIBs). "What we've seen is a shift from sukuk (Islamic bond) to conventional 144A compliant issues" says one partner, and another agrees: "There has been a complete shift towards the 144A market because that's where the cash is."

Activity in the sukuk market was notably down on previous years, and along with the financial crisis practitioners noted the impact of a scholarly decree issued in February 2008 over product classification. "AAOIFI (Accounting & Auditing Organisation for Islamic Finance Institutions) issued a new statement on sukuk which caused quite a lot of concern in the area," says one partner. "Certain products have faded away, more conservative products are back in vogue."

However, others were sceptical about its impact: "The sukuk rule change hit when the market collapsed so it didn't make much difference," says one partner. "It affected the way people did sukuks, not the number of sukuks being done," another partner explains.

Another interesting development is a new ruling over the tawarruq (asset purchase and deferred payment sale) instrument that was passed in April. The ruling offers clarification over what can be described as a permissible classical tawarruq, and effectively bans transactions where there is a relationship between the financer and the third party.

Firms are also waiting to see what impact the proposed government guarantee scheme will have. Although not yet signed, the legislation will allow banks to issue government-backed debt.

The M&A sector has been hit hard too. Here, more than anywhere else, the downturn has caused regional differences to become more pronounced. "Outside of Dubai the conventional M&A market is healthier, there is more money in other places" explains one partner. Abu Dhabi is certainly more active. "You don't have the same boom-time attitude," says one partner. "We have more outbound activity in Abu Dhabi."

Abu Dhabi is also proving to be a more fruitful location for project finance lawyers as there is still a need for infrastructure improvements. However, this need has not been matched by available funding. "The immense appetite there was for projects in the UAE hasn't waned in terms of interest, but the financers are not there," says one partner.