Dubai World debt restructure good for banks

16 February 2015

Creditor approval of debt restructuring deal will help to lower bad loan volumes

The creditor consensus reached on the restructuring of Dubai World’s $14.6bn debt on 15 February is a welcome development for the UAE’s banking sector.

It is a move that should improve the risk profile of the Dubai World debt exposure, which is still sitting on many UAE banks’ balance sheets since the initial restructuring was signed in 2011.

The new restructuring plan involves the early repayment of $2.9bn due this September and the extension of the $10bn due in September 2018 to 2022.  

The proposed restructuring is seen as far more attractive and less risky than the original debt deal.

The larger tranche is expected to have an amortising debt repayment structure rather than a one-off ‘bullet’ repayment.

This means creditors can receive repayments at scheduled times over the lifecycle of the loan, rather than waiting for a bullet repayment at the end of the debt’s maturity.  

It is also anticipated the debt will be priced at higher rates as a result of the extension of the tenor.

Banks, such as Emirates NBD, which had one of the largest exposures to Dubai World, have been able to reclassify the Dubai World debt as performing earlier this year and, therefore, improving its non-performing (NPL) or ‘bad’ loan ratio. The restructuring of the debt is also expected to reduce the total problem loan volume for the entire UAE banking sector.

The creditor consensus means there is now no need for a creditor vote on the proposed restructuring, which was originally scheduled for mid-March.

The lenders’ support for the restructuring plans suggests that bank confidence in Dubai World, and perhaps in the credit profile of Dubai as a whole, has also improved.

The conglomerate is already said to have mandated several international banks to raise new debt of up to $1.2bn, that could potentially be used to enable Dubai World to repay its 2015 debt obligations.

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