Dubai Group has moved closer to a deal with creditors over its US$6 billion debt restructuring, a significant step forward in some of the longest-running debt renegotiations still lingering after the emirate's financial crisis.
The investment vehicle, an arm of the Dubai Holding conglomerate, has been locked in talks with creditors over $10bn worth of liabilities since 2010, $4bn of which are inter-company borrowings.
But Dubai Group has reached an agreement with the banks representing two rival factions of creditors on the final terms of a deal.
The agreement with the coordinating committee of lenders was a "significant milestone in what has been a complex process", said Fadel Al Ali, Dubai Group's chief executive.
He said that upon successful completion of the final restructuring, $4bn worth of related party debt would be subordinated to the claims of the bank creditors.
"We are now nearing the end and are confident that all parties will work with us to finalise the restructuring by early summer," he said.
Dubai Group's loans are the emirate's last lingering debt renegotiations from the global financial crisis. Talks have proved particularly gruelling because of the need to reconcile creditors whose loans are backed by assets with those whose lending was unsecured.
Lenders will be asked to extend repayment deadlines by between three and 12 years. A Dubai Group spokesman denied reports that creditors could receive an equity stake in the company.
Individual banks will need to formally agree to the terms with their internal credit committees, the company said.
Dubai Group's debt talks have proved unusually fractious, with creditors including Royal Bank of Scotland, Commerzbank, Standard Bank and Commercial International Bank commencing arbitration against the firm in London. The settlement of that legal action has since allowed negotiations to resume.
The easing of Dubai's debt troubles has coincided with a surge in tourist arrivals, a resumption of projects, and a strengthening property market. By some measures, investors appear more comfortable with the emirate's debts than they have for many years.
Credit default swaps protecting Dubai's sovereign bonds against the possibility of default have fallen to lows of 209 basis points, with the emirate reflecting a lower credit risk in the eyes of markets than the Italian or Spanish governments.
Dubai Group's assets include stakes in Bank Muscat, EFG Hermes, the Malaysian lender Bank Islam and hotels and shopping centres in the United States, Europe and India.
The company hired scores of Wall Street bankers before the financial crisis, but many of its highly leveraged acquisitions have since been diluted or gone sour, most notably its investments in Cyprus's banking sector.
Bank shares in Dubai and Abu Dhabi rose following the news of the deal, with Emirates NBD shares leaping 4.2 per cent to Dh5.39 each, the highest level since November 2008.
Dubai's biggest bank said last month that it had set aside a total of Dh2.51bn to cover for a Dh4.6bn exposure to Dubai Group.
The completion of Dubai Group's debt restructuring would allow banks to approach their provisioning with a greater degree of confidence, said Khalid Howladar, a financial analyst at Moody's Investors Service, the credit ratings agency.
"Compared to Dubai World we've generally assumed more conservative loss assumptions for the banks for this restructuring given the nature of the assets of the company," he said. "Closing out that restructuring enables the banking sector in some sense to put behind them one of the more problematic impairments they have on their books and push forward with a bit more certainty."
Banks in the region have been slowing levels of capital set aside as provisions for the costs of bad debts since the start of the year. Some are even releasing capital previously booked to deal with bad debts - HSBC Middle East unwound $61 million in provisions across the region during the first quarter.
Meanwhile, Dubai Holding Commercial Operations Group, another arm of Dubai Holding that owns Jumeirah Group and Dubai Properties Group, is expected to return to capital markets ahead of a bond maturity next year that will test investor appetite for its debts.