After the global panic that followed the November 2009 announcement that Dubai World would seek a debt standstill agreement on about $25bn owed to bondholders, banks, contractors, suppliers and homeowners, financial markets have taken the news that a second state-owned firm needs to go through a similar exercise much better.
Sixty per cent of financial creditors have agreed to the terms of Dubai World’s debt restructuring proposal
In May, it was revealed that Dubai Holding was already at work on a debt restructuring that could run into several billion dollars, but markets largely shrugged off the news.
This is, in part, because of the way the Dubai World restructuring has played out, but also because the Dubai Holding restructuring had been widely expected.
After Dubai World’s initial botched announcement on the eve of a public holiday, its debt problems have been handled much better. A coordinating committee of seven banks has been appointed to represent the interests of financial creditors, and Dubai World has reassured the capital markets by prioritising bond repayments and paying them as they fall due.
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|Source: EGF hermes|
Progress has exceeded expectations as well. On 20 May, Dubai World announced that it had agreed with the coordinating committee to the ‘headline economic terms’ of the restructuring. The agreement will cover $23.5bn of financial creditor debt at Dubai World, including some bank debt held by property developer Nakheel.
Under the plan, the Dubai government will swap $8.9bn of fresh funds, pumped into Dubai World to stop its collapse, into equity. That will leave $14.4bn of debt that will be swapped into a $4.4bn five-year loan with a 1 per cent interest rate, and a $10bn eight-year loan with three different interest rate options, including the option to have a shortfall guarantee, which ensures repayment if the company cannot repay or refinance the loans.
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A source close to the coordinating committee says further talks with Dubai World and its advisers are necessary to finish off the negotiations, but a meeting is planned for June where the coordinating committee will present the proposal to the wider group of banks owed money by Dubai World.
“This agreement is just the headline terms, there are still more talks planned before we can say a deal is done,” says the source.
Pressure is now on for the banks as they face the prospect of losing out on interest payments on outstanding loans from the beginning of May. If this goes on for too long the banks will have to reclassify the loans as non-performing and it will start to impact their profitability.
Although a final deal may still be some time away, significant progress has been made. In under six months, the company has come close to getting a full restructuring proposal approved. Originally, a debt standstill was all that was expected to be agreed in that time.
“The agreement on 20 May was a very important step in getting this process resolved. It’s not over yet, but we have got to this point much faster than most analysts were expecting,” says a Dubai World spokesman.
Khatija Haque, analyst at the local Shuaa Capital, agrees: “That 60 per cent of financial creditors have agreed to the proposal in principle is a significant achievement and bodes well that the rest of the creditors will also sign up to it. All the creditors will need to agree to the terms. It could take several weeks before we see final signatures.”
The speed with which progress has been made on the Dubai World restructuring will be a comfort to investors and debt holders in Dubai Holding, as it now starts to look at restructuring some of its liabilities.
Bond holders in the company take comfort from the fact that the restructuring of Dubai Holding’s debts is expected to follow a similar pattern to Dubai World’s, with bond debts repaid at maturity, and bank debt extended and repriced.
“The Dubai Holding restructuring will be OK for the bond holders as they are expected to get repaid as the bonds fall due. The Dubai World process has shown that they don’t want to take on the bond holders and prefer to push through a deal with the banks and trade creditors,” says one bond analyst in London.
Restructuring Dubai Holding promises to be a more straight-forward process than Dubai World. It has no capital market debt due until January 2011, giving it the advantage of time. It is also structured in a way that makes cross-default between subsidiaries more difficult. “With the Nakheel 2009 sukuk, there was a Dubai World guarantee, which complicated the restructuring,” says Andre Adrijanov, corporate analyst at the UK’s Exotix. “Plus the significant size of the debt meant it was a tough process. Dubai Holding does not have these issues of parent company guarantees, so a restructuring can be done at the level of subsidiaries.”
The two main subsidiaries expected to undergo some debt restructuring are private equity group, Dubai International Capital (DIC) and Dubai Group, which primarily invests in banking and insurance companies. The most pressing concerns for these is DIC’s $1.25bn loan that matures in June.
But those who undeniably lose out in both processes are the trade creditors. While banks underwent complicated risk assessments of all their loans, based on an understanding of the long-term potential of projects, trade creditors’ debt largely stems from short-term contracts for services already delivered. Lacking a unified voice, the trade creditors’ deal from Dubai World has been structured to divide and rule. Of Nakheel’s $9.3bn debt, trade creditors – a mixture of contractors, advertising firms and suppliers – are estimated to account for more than $3bn worth.
They have been offered a deal that would see them repaid in full – 40 per cent in cash and the remainder in the form of a sukuk, with a five-year maturity paying 10 per cent interest a year. By mid-May, about 50 per cent of trade creditors by value had agreed to the deal. Once 65 per cent of the creditors have agreed, the cash payment will be made.
However, the sukuk will not be issued until 95 per cent of the trade creditors have agreed to the deal. Some contractors have complained that the deal favours smaller creditors, and risks leaving larger creditors without a settlement if the 95 per cent threshold is not reached. “We feel there is no choice but to accept this offer,” says one contractor.
It is still unclear what efforts will be made to clear the trade creditor debt on Dubai Holding subsidiaries, such as Tatweer and Dubai Properties, and how large the backlog of payments is.
“We have some large outstanding bills from them, and, from what we understand, they are trying to use their resources to keep some projects moving, while also paying off some of the contractor debt. But it is slow progress,” says the head of another contracting firm in the UAE.
But what is most important for Dubai now is not the damage done to its reputation since the onset of its debt crisis – most banks have short memories as the success of Dubai’s sovereign $1.93bn bond issue in October 2009 illustrated. Kick-starting the economy is the main priority.
Dubai’s economy is expected to contract again in 2010, while the rest of the region returns to growth. The emirate’s gross domestic product is forecast to shrink 0.5 per cent this year, according to Washington-based Institute of International Finance. Robert Thursfield, bank analyst at the US’ Fitch Ratings says the Dubai World deal could leave some banks having to book large provisions. That could hang over already anaemic loan growth in the UAE.
Restarting construction activity in Dubai will be key to getting the economy moving again. Nakheel is offering contractors a 45-day payment term on restarting work on some of its stalled projects. But contractors remain sceptical about whether that promise will be honoured.
Although a deal with Nakheel’s trade creditors should be in place before the end of the year, it may be an even longer wait before confidence is restored in the emirate’s ability to make timely payments to its contractors.
The final details of the Dubai World settlement will also be closely watched now. Although the repayment proposals do not include any headline ‘haircut’, or discount on the amount originally lent, the level of interest paid could result in banks taking a loss if it is effectively a negative real interest rate over the five- or eight-year loan tenor.
Meanwhile, real estate and construction have become dirty words among the emirate’s banking fraternity. The financing model of using state-owned vehicles to borrow cheaply under the assumption that banks are taking on quasi-sovereign risk has been completely undermined. Dubai will have to find new ways to fund infrastructure spending if it wants to get its economy going again and restore battered confidence in its ability to deliver on its promises.