Dubai deal just the kickoff in a long game

Dubai World, the holding company harbouring the emirate’s flagship property firm Nakheel, builder of palm-shaped islands, is the playing field for one of the biggest emerging markets debt dramas ever, and an announcement is expected soon.

“We have a long way to go before we have any real clarity on how this restructuring will pan out,” a London-based banker specialising in lending to the Middle East said.

All restructurings are unhappy in their own way and the size, scope and political dimensions of Dubai World’s make it unique. Bankers view political support from Abu Dhabi or the UAE as critical to the restructuring rather than the terms, which will change as negotiations progress.

“The solution is still looking pretty political. Banks will want to see more explicit support governmentally and ideally at the UAE level,” a senior emerging markets banker said.

Dubai World’s ability to generate cashflow is the next most important variable. Bankers believe cashflow generation is limited and see the restructuring as a play on land and real estate with slower recovery potential than RUSAL.

A downturn in commodity prices limited RUSAL’s ability to service and repay debt, which improved as prices rose. A quick exit is not expected for Dubai as property units Nakheel and Limitless have little cashflow and their value is their assets.

Dubai World has been in talks with a panel made up of Standard Chartered, HSBC, Lloyds, Royal Bank of Scotland, Bank of Tokyo-Mitsubishi, Emirates NBD and Abu Dhabi Commercial Bank, which are believed to have two-thirds of total exposure.

RUSAL’s restructuring saw interest payments rescheduled and a “pay as you go” process included where any extra funds were used to service as much debt as possible.

A similar plan is envisaged for Dubai World, which would include provisions to capitalise interest which could be added to the principal through a “Payment in Kind” or PIK arrangement that would turn interest payments off until they could be met. Interest payments would also be rescheduled to match cashflow.

The restructuring could bring all of Dubai World’s debt instruments together into a deal with common terms, creating an instrument that can be referenced and traded, creating its own liquidity that will give creditors a better idea of valuation and where they stand regarding their debt.

“If you have one big massive debt instrument it will build its own liquidity – people will make a price on the paper which will give a level of transparency which will be helpful for those holding the paper that want to get rid of it,” the senior banker said.

The impact on the Gulf’s banking sector could be limited by the use of a repo arrangement that could let local banks borrow from the central bank using the paper as security which would improve regional liquidity, bankers said.

“Do you ask local banks to take a hit and recapitalise them or do you allow them to take a non-performing asset and put it into repo facility or offer a guarantee structure like the Asset Protection Scheme in the UK?” the senior banker said.

Negotiations are likely to be lengthy. RUSAL’s debt restructuring took about seven and a half months from the presentation of proposals and the standstill was extended three or four times.

Banks are likely to want to appoint their own restructuring officer to analyse Dubai World’s proposals. Aidan Birkett was appointed to advise Dubai World by the Dubai government but bankers will want to run the proposals past their own advisers, accountants and auditors which are acting in the interests of shareholders and creditors.

Mixed record
Dissents in the ranks is a threat to the restructuring as bondholders in Nakheel will have a different idea of how the restructuring should unfold to senior lenders and may refuse to play ball.

“Whatever the proposal, creditors will say that it doesn’t work for them and will form their own group to influence the restructuring,” the London-based banker said.

Only one Middle Eastern restructuring has been resolved so far – Kuwait’s Global Investment House reached a deal with creditors in December to reschedule $1.7bn of debt and entered new three-year facilities with 53 lenders.

“The other restructurings are out there and are going nowhere as there is not a unanimous consenting creditor group,” the senior banker said.

Other restructurings such as Kuwait’s Investment Dar had to go to court to overcome resistance from minority dissenters, which could also be an option for Dubai World if its restructuring proves divisive.

Investment Dar, which owns half of British carmaker Aston Martin, was put under the protection of Kuwait’s $5.2bn Financial Stability Law package on March 14 after 20 percent of creditors fought the company’s restructuring plan.

All litigation and judgements against the company by dissenting minority investors will be stayed until the restructuring plan has been agreed by the court. The restructuring plan is expected to offer full repayment and will now be monitored by the Central Bank of Kuwait.