Reaction to Dubai World deal
Conglomerate agrees on deal to restructure $23.5 billion in debt with its core lenders in a deal that involves no new government money
May 21, 2010 12:23 by Rasha Reslan
The deal, which includes no new money from the government and is broadly in line with proposals made in March, must still be agreed by banks outside the core negotiating panel, which holds 60 percent of the exposure, Dubai World said on Thursday.
Lenders will wait up to eight years to get their $14.4 billion back but have avoided a “haircut” on their principal under the terms of the deal, which offers 1 percent cash interest and an extra 1.5-2.5 percent per annum rolled up into a lump sum payment on maturity. Dubai will convert into equity the $8.9 billion it is owed by the group.
The restructuring has hung over Dubai since last November, and its resolution will be a relief to investors in the emirate, which is struggling with an over-saturated property market, sluggish bank lending and the risk of more debt problems.
“We are not entirely happy, but we are in a no-choice situation. Under the circumstances, this seems the best deal possible, even though it is not entirely satisfactory,” said a banker at a Gulf-based lender outside the core group.
Fitch Ratings said bank provisions linked to the debt deal will not cause “major difficulties” for the UAE banking system. Fitch put the ratings of five Dubai-based banks on negative watch in December.
“The agency is also concerned that other Dubai government-related entities may be experiencing debt problems, albeit not of this magnitude,” it added.
Dubai, famed for extravagant property projects and a tax-free lifestyle, has struggled to bring its debt burden, estimated around $100 billion, under control.
The Gulf Arab emirate ran up massive debts to turn itself into a trade and tourism hub, but the global financial crisis and a collapse in oil prices in 2008 brought an abrupt end to a six-year boom.
Analysts said the deal does little to alleviate the chronic oversupply in Dubai’s property market, a key driver of the emirate’s growth.
“It adds a little bit of comfort, but there is still a crisis of confidence in terms of real estate,” said Chet Riley, an analyst at Nomura.
The emirate stunned global markets last November when it said it would delay repayment of $26 billion in debt linked to Dubai World and its property units, Nakheel and Limitless. Dubai unveiled a $9.5 billion rescue plan in March.
“This closes the main chapter, but that doesn’t mean we don’t have a bumpy ride ahead,” said Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments.
“There are still issues such as Dubai Holding and others.”
Speculation has centered on Dubai Holding – owned by the emirate’s ruler, Sheikh Mohammed bin Rashid Al-Maktoum – which has about $10 billion in outstanding debt.
Among upcoming Dubai debt maturities, Dubai International Capital, the overseas investment arm of Dubai Holding, has a $1.25 billion loan due in June. The company has said it will refinance the loan. A $2.1 billion Dubai World loan due in June falls under the debt deal.
UAE markets gave a weary welcome to the debt deal, with investors more worried about sluggish economic recovery and fallout from Greece’s debt problems, while Dubai-linked bonds rallied.
Dubai’s index ended 0.4 percent higher, but is down 10 percent since surging 6.3 percent in two days after Dubai World made its first offer to creditors on March 25. Abu Dhabi’s benchmark rose 0.2 percent.
The price of insuring against default of Dubai debt edged slightly lower to 466.8 basis points, according to CMA.
“If this had come out two, three weeks ago, there would have been a much bigger impact, but the world has much bigger fish to fry,” said Matthew Wakeman, EFG-Hermes managing director for cash and equity-linked trading.
“The terms are strong, but nobody is going to be jumping up and down for joy for a restructuring. The main thing is that it reduces uncertainty.”
A successful debt deal may ease constraints on local banks, which have largely refrained from providing the credit needed by the UAE economy to emerge from the crisis.
But it also means local banks will need to start the painful process of writing down loans and purging bloated balance sheets.
Property developer Nakheel, which repaid a $980 million Islamic bond last week, is in parallel talks over about $10.5 billion in debt and has offered its trade creditors full repayment, with 40 percent in cash and the rest via an Islamic bond, or sukuk, which has a 10 percent annual return.
The disparity between the two offers has been a sticking point for some lenders, who feel that Nakheel has been offered a far better deal on the interest rate.
The Dubai World proposal offers repayment over five or eight years and allows lenders additional options, depending on whether they are local or foreign lenders and on the currency of their loans.
The proposal has two tranches covering the $14.4 billion owed to the bank lenders. The first tranche, for $4.4 billion, offers a five-year maturity and 1 percent cash interest but no additional lump sum payment on maturity – referred to as a payment in kind (PIK) – and no shortfall guarantee.
The second tranche covers $10 billion, comes with an eight-year maturity, offers 1 percent interest, and varying PIK rates and shortfall guarantees depending on the options lenders choose. The PIK rates range from 1.5 percent up to 2.5 percent in certain years of the maturity.