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Ghosts of Dubai World’s past may return to haunt

Dubai World

The emirate is once again dreaming big with plans for a city centre canal and a $1 billion replica of India's Taj Mahal.

November 22, 2012 9:00 by

Under this plan, signed in March 2011, it was envisaged that between $1.3 and $2.3 billion would be raised between 2010 and 2012 through the disposal of P&O Ferries and warehouse developer Gazeley.

Another $3.9 to $5.3 billion could be raised during 2013-2015 as holdings such as department stores Barneys and Loehmann’s and MGM Resorts International were offloaded, the document said.

Dubai World lost control of Barneys in May 2012 as part of a restructuring at the U.S.-based luxury retailer, while Loehmann’s exited bankruptcy in March 2011.

However, the continued depression in valuations in a global economy not conducive to divestments has meant values have not recovered and asset sales have not been completed as planned.

For some assets, Dubai World admitted it would be unable to get back its original investment, having acquired at the top of the market. It bought its MGM Resorts stake at an average of $83.15 a share; the stock closed at $9.64 on Tuesday.

The lack of action to divest the foreign portfolio is understandable in the current environment but, given the restructuring plan was based upon it, some bankers are concerned.


“The main issue is the depressed value of the international portfolio. Local assets are flourishing and doing great business but we haven’t seen any credible asset sales so far which can help reduce the debt burden,” the seniorDubai banker said.

“The most likely situation we see is Dubai going to the banks and again saying they have no money to repay the debt.”

Granted, there are some encouraging signs in terms of borrowing conditions overall. Both the sovereign and government-related entities (GREs) have been able to access the bond market – Dubai last issued a $1.25 billion Islamic bond in April.

Dubai has been helped by the successful refinancing this year of Islamic bonds issued by DIFC Investments and Jebel Ali Free Zone Authority and the conclusion of restructurings at Drydocks World and Limitless.

“You need to look at the global situation and then look at Dubai. We are more committed to meeting our debt obligations than many others around the globe,” said Khamis Jumaa Buamim, chairman of Dubai Drydocks, which completed a $2.2 billion restructuring earlier this year.

Yet signs of “debt fatigue” among lenders are also beginning to show, with the court action begun by three international banks against Dubai Group in September, following nearly two years of talks on amending $10 billion of liabilities, an example of a more aggressive approach in relation to Dubai.

If the fears of senior bankers about a lack of divestments come to fruition and Dubai World requires a second restructuring, it is likely other options than just extending the debt will be on the table.

One banker involved in the original restructuring said he expects lenders to be offered a debt-for-equity style deal, with some of Dubai World’s assets placed in a special purpose vehicle and creditors given a stake in the entity.

Such a plan would allow the value of assets to continue to recover and avoid a messy firesale in the months before the repayment date, as well as solving the potentially tricky problem of Dubai ceding any political control in one of its main state investment vehicles if banks try to enforce a default in court.

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