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Legal limbo stymies banks’ recovery of Dubai Govt

Legal limbo stymies banks’ recovery of Dubai Govt

More than two years after the Dubai debt crisis erupted, restructuring of corporate debts remain in legal limbo, unclear on how banks can get back their money from government-linked enterprises.

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February 22, 2012 4:52 by



More than two years after the Dubai debt crisis erupted, the restructuring of corporate debts remains in legal limbo as it is unclear how banks can get back their money from government-linked enterprises in the Gulf state.

The impasse, which is aggravated by deficient bankruptcy legislation, is finally pushing some banks to lose patience and consider legal action. But their tougher stance is being matched by a hardening of the government’s attitude to bailing out state-linked entities, raising the risk of further delays in completing these restructurings.

In other jurisdictions, the spectre of legal action would have loomed long before now.

Local and international banks have been waiting nearly two years in some cases for resolutions to drawn-out restructurings of entities hit by the debt crisis in 2009, when Dubai was forced to request a standstill on flagship conglomerate Dubai World’s $25 billion pile of debt.

While Dubai World reached agreement on a debt restructuring a year ago, a string of other state-linked entities have not, leaving banks unable to get back money they are owed. As well as being hampered by a lack of legal remedies to force the issue, banks are also undermined by the fact that potential plaintiffs are companies ultimately owned by the emirate’s ruling family .

“You’ve got to get a Dubai judge to sign off on anything you bring, and it’s never going to happen as the owner is the heir apparent,” said one Dubai-based banker, talking about potential legal action by banks against Zabeel Investments, the investment vehicle of the Crown Prince of Dubai.

Talks on restructuring 6 billion dirhams ($1.63 billion) of Zabeel’s liabilities have ground to a halt with multiple loans in limbo and few assets available for sale, leaving banks facing steep reductions in the loan principal they are likely to recover, sources told Reuters in January.
Banks have sent multiple notices demanding repayment, but no legal action has been taken as it is not known whether such a step would succeed in a Dubai court.

The government’s hardening attitude to providing financial support is further complicating the situation for banks.

Banks involved in a $10 billion restructuring of Dubai Group, in which banks are owed $6 billion, said in December they were considering legal action to secure their dues from the company, which had not paid interest on its debt pile since August 2010, sources told Reuters in November.
This month the government walked away from talks on the Dubai Group restructuring, dashing hopes of a state-backed rescue. Dubai Group is a unit of Dubai Holding, the personal investment vehicle of the ruler of Dubai.

Analysts say the government has been emboldened in its negotiations with creditors following a number of successful debt repayments, including one for a $3.5 billion sukuk issued by state-owned developer Nakheel, and by Europe’s sovereign debt crisis, which has made Dubai’s difficulties in paying back debt seem minor by comparison.

The reduction of well over 50 percent which banks will be forced to swallow on their Greek bond holdings, as part of the euro zone’s rescue plan for Greece, is far worse than anything seen on a Dubairestructuring. Dubai World promised to fully repay $14.7 billion it owed banks, but over a longer period of time and at a lower interest rate.

“To be honest, when the Dubai World restructuring news came out, I was thinking and, perhaps even hoping , they (Dubai World) would drive quite a bargain to reach a more sustainable capital structure. But they chose to go the other way,” said Jean-Michel Saliba, economist at BofA Merrill Lynch Global Research.

Banks involved in the Dubai Group restructuring have argued that the government should provide financial support because the documentation promised it. However, they are not in a good position to enforce the claim.



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