A long road ahead for Dubai World

31 March 2010

Debt proposals lack clarity on crucial details and a final settlement will still be a long way off

The government of Dubai has announced a series of proposals to restructure the debt of state-owned firms, but several crucial details are still missing from the plan. Creditors are yet to agree to the government’s offer, and a final settlement may still be a long way off.

On 25 March, four months after announcing its desire for a six-month standstill agreement with banks while it restructured the $23.5bn debt held by its Dubai World conglomerate, Dubai announced how it wanted to handle the debt crisis that has engulfed the firm since 2009.

After a long night of talks with the seven-member co-ordinating committee, which represents the 100-odd financial creditors to Dubai World and its subsidiary Nakheel, the government announced that it would commit $9.5bn to the two firms in a bid to help restructure their debt. 

The funds would be made up of the $5.7bn left over from previously announced loans from the government of Abu Dhabi in 2009, with the remaining $3.8bn coming from undisclosed “internal Dubai government resources”.

Clearing dues

Under the government’s proposal, $8bn would be ploughed into property subsidiary Nakheel, to be restructured separately from Dubai World, which in turn would receive $1.5bn in cash to make up interest payments on its debts and to provide new working capital.

Dubai World is aware that it is only at the beginning of what could be a very long road

Dubai World’s creditors would be asked to swap their debt for the new loans with an expanded tenor of either five or eight years under the new proposals.

Separately, Nakheel would offer new loan deals to its creditors, although the terms of these loans still have to be negotiated.

Under the proposal, Nakheel will be able to repay a $980m sukuk that matures in May 2010 and another $750m sukuk in January 2011, a proposal that has been greeted enthusiastically by investors.

“This came as a pleasant surprise,” says Fadi Moussalli, regional director of international capital at US property manager Jones Lang LaSalle’s Dubai office. “Hopes were fading away for the sukuk holder, but it now looks like the proposal will cover this.” Smaller trade creditors to Nakheel would also benefit from the proposals.

Around half of Nakheel’s trade creditors, owed up to AED500,000 ($136,121), would have their balances settled in full. Larger creditors, who have so far not been involved in the restructuring talks, would be offered 40 per cent of the amount they are owed in cash, with the remaining 60 per cent to be paid off through a sukuk.

The sukuk would allow Nakheel to repay trade creditors’ outstanding balances over a period of five years, a spokesperson for Nakheel tells MEED. The sukuk would be substantial, say sources with knowledge of Nakheel’s finances.

“We estimate roughly half of the total $22bn in Nakheel’s liabilities is working capital or trade creditor-related,” says Saud Masud, regional head of research at Swiss bank UBS. “Hence a 40 per cent cash payout implies nearly $4bn in payments to contractors.”

Meanwhile, investors in Nakheel property developments would be given the chance to transfer their money from shelved projects to schemes that are at a more advanced stage of completion.

The proposals are a surprise to analysts because the bulk of the money has been allocated to Nakheel, whose outlandish and speculative real estate projects were one of the main causes of the debt build-up among Dubai World companies.

The government hopes the capital injection will allow Nakheel to resume work on stalled projects, which in turn will provide a stimulus for the local property sector. During the boom period of 2004-08, real estate accounted for a third of Dubai’s gross domestic product (GDP), but it has suffered from a slump in demand and a fall of more than half in property prices in the past 18 months. 

The restructuring proposals immediately had a positive effect on Dubai’s debt market. Credit default swap spreads, which determine the cost of insuring debt issued by the government, narrowed by 45-60 basis points (bp) to about 370bp on the day of the announcement, having jumped to 600bp in November 2009. The drop makes it cheaper for Dubai to obtain finance and roll over loans. 

Nakheel bonds also rallied in the wake of the news, and the Dubai Financial Market general index closed 4.3 per cent higher on 25 March than the previous day. 

Restoring confidence

“The more clarity the government provides, the more they are injecting doses of much-needed confidence into the market,” says Moussalli. “Confidence is one of the main ingredients for a sustainable recovery.” 

But confidence is all the government proposals has generated so far.

“This is a positive announcement, but the devil will be in the details, and none of the critical information is there yet,” says a banker close to the talks. The lack of clarity on interest payments to lenders remains a major concern. The rate Dubai World pays out will be key in determining how much of a loss creditors have to absorb and therefore how attractive the proposals are to them. 

“This is a good start; there are no haircuts on the principal amounts [cuts to the outstanding balances],” says one banker involved in the restructuring talks. “But it will all hinge on the interest rates offered over the life of the new loans.”

The government also continues to distance itself from accepting any real responsibility for Dubai World’s debts in the long term, saying its own debt totals just $30bn, compared to an annual GDP of about $80bn. It does not have plans to make any more cash available to the companies, believing the amounts offered under the proposal are enough to get the two firms back on track.

Given that the government has already injected around $20bn into Dubai World, this is probably a sensible stance.

But how the conglomerate will repay the amount it owes to the government, and ultimately how Abu Dhabi will get back the money it has lent to Dubai, is unclear. The economic slowdown pushed Dubai’s budget into a $1.1bn deficit in 2009, with a deficit of $1.63bn, or 17 per cent of expenditure, expected in 2010. Beyond the immediate problem of Dubai World and Nakheel, other doubts still remain.

Trade creditors have so far had little chance to voice their opinions in the restructuring talks. Their willingness to swap bills that should have been settled in 2009 for a Nakheel bond which pays out over five years is yet to be determined.

Property unit Limitless was excluded from the recapitalisation programme as the company “doesn’t require government support”, the government said at the time. However, the company is understood to have been granted a 90-day extension on the repayment of a $1.2bn loan due on 31 March.  

Real estate analysts in Dubai are worried that bailing out Nakheel will exacerbate the problem of oversupply in the market. Masud estimates that the proposal, if successful, could cause real prices to fall another 20-30 per cent.

The wider picture

The next step in the restructuring talks will be for the coordinating committee, Dubai World and its advisers to hammer out the finer details of the proposal and present it to the wider creditor group.

If the government can convince the majority of creditors that the plan is sound, it can use a specially-created tribunal to push it through. But a dissenting minority may still try to launch overseas legal actions rather than go through the voluntary restructuring process.

Dubai World is aware that it is only at the beginning of what could be a very long road. “This is not a solution to the problems; it is a path towards a solution,” says the conglomerate’s spokesperson.

Dubai World’s chief restructuring officer Aidan Birkett hopes to finalise the plan within a few months, but, as Masud observes: “The absence of sovereign guarantee, in addition to the complex nature of the transaction, may lead to negotiations getting stretched out for months to come.”

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