The agreement between state-owned Dubai World and the majority of its creditors to restructure its $14.6bn-worth of debt is a credit-positive development that will benefit the balance sheets of exposed UAE banks.
A research note from US ratings agency Moodys Investors Service says a preliminary restructuring agreement reached in January means the unpaid debt can now be viewed as performing, therefore improving the affected banks non-performing loan (NPL) ratios.
According to Moodys, Dubai Worlds debt exposure presented about 22 per cent of the UAEs total problem loans, which stood at 8.7 per cent as of June 2014.
The ratings agency estimates that the reclassification of the outstanding debt will reduce the NPL ratio by about 2 per cent, bringing the total ratio down to 6 per cent for the full year 2014.
The January agreement on a new restructuring was reached under Decree 57, which means Dubai World only needs to get 66 per cent of creditors to agree to material changes to amendments to the original loan documentation.
Typically under the terms of the contract, 100 per cent of creditors would have to approve changes.
A total of 73 per cent of the creditors agreed to the proposed restructuring during the January tribunal. A second tribunal is taking place in February, with creditors voting on the new proposal in mid-March.
The new restructuring includes the immediate repayment of the 2015 tranche of $2.96bn, an extension of the 2018 tranche to 2022 with an amortising repayment structure, and an increase in the pricing of the debt.
The first restructuring of Dubai Worlds debt was reached in 2011, almost two years after the conglomerate announced a debt standstill in November 2009 at the height of the financial crisis.
The restructuring was done in two tranches, with about $4.4bn due in 2015 and $10.1bn due in 2018.