Dubai World's US$24.8 billion (Dh91.09bn) debt restructuring was never expected to be short, sweet and easy. Six months into a complex reorganisation that will surely be remembered as a seminal event in the UAE's modern financial history, however, analysts say a resolution is nearing. It is one they hope will lift markets and bring confidence back to crisis-weary contractors and property investors.
"People are comfortable that a resolution will be achieved soon," said Majed Azzam, a property analyst at Al-Futtaim HC Securities in Dubai. "Most of the lack of clarity has been alleviated, and now the uncertainty is more towards the lenders, because these guys are still not sure what they're going to get." Bringing the Dubai World negotiations to a successful close has long been a priority for the Dubai Government. Dubai World is one of the emirate's three main holding companies, and its well-publicised struggles have not made the job of reinvigorating the local economy any easier.
Dubai World began the restructuring exercise in November but took its first big step towards a deal in March, when it floated a proposal that offered new terms to banks, trade creditors and investors. The company needed a revised repayment schedule on debt after revenue dried up at its property subsidiaries and refinancing large loans became impossible because of the financial crisis. Some of its subsidiaries, however, including the private equity arm Istithmar and the ports operator DP World, were excluded from the exercise because they were in good financial health.
Under the plan put forward in March, contractors and suppliers serving Nakheel, the Dubai World-owned property developer behind the emirate's Palm islands, would each receive up to Dh500,000 in cash to settle unpaid bills. Companies owed more would be paid 40 per cent in cash and 60 per cent in a five-year Islamic bond with a 10 per cent profit rate. The Islamic bond, or sukuk, would be secured against the company's land holdings.
Investors in a separate pair of Nakheel sukuk, one of which was paid on time last week, were to be fully repaid under the proposal, which called for $9.5bn of cash injections into Dubai World. Some of the money would come from the Dubai Financial Support Fund, a body set up last year to distribute aid to state-owned companies. The remainder - about $3.8bn - would come from internal government resources.
The main snag now, according to Mr Azzam and other analysts, is tension between Dubai World and its creditor banks. Banks are owed some $14.2bn, which the company wants to reschedule into five and eight-year loans at 1 per cent interest, with an extra 1 per cent paid at the end of the eight-year term. Some banks view those terms as worse than those given to contractors, suppliers and sukuk investors. While many foreign lenders have cheered the proposal, Abu Dhabi Commercial Bank and Emirates NBD, the two local lenders on a seven-member panel representing 97 creditor banks, are understood to be especially resistant.
They are said to want interest tied to the prevailing market rates, instead of flat rates, in order to better align their borrowing costs with interest income from restructured loans. Local banks typically borrow in dirhams, and their cost of funding is reflected by the Emirates interbank offered rate (Eibor), which stands at about 2.3 per cent. They are said to claim that the margin between Eibor and Dubai World's 1 per cent offer could translate into losses of up to 25 per cent on loans they made to the conglomerate.
Despite resistance from local banks, which government sources say is unjustified given their low position in Dubai World's financial pecking order, there are signs that the restructuring is nearing its final stages, says Nish Popat, a banker in Dubai. Sultan al Suwaidi, the Governor of the Central Bank, last week told reporters the talks were going "very well". And Nakheel said on Thursday that trade creditors accounting for more than half of all claimants against the developer had agreed to the March proposal.
"The sukuk holders are being repaid, contractors are being given a 40 per cent payment and 60 per cent in bonds, and the only thing we have left are bankers discussing whether 1 per cent is adequate," Mr Popat says. "The market has now priced in that we're 95 per cent there, and it's a question of dotting i's and crossing t's." As a resolution draws nearer, the effects of the restructuring are still being felt. Bankers say many companies are waiting for calmer waters before attempting to raise money through bond issues and listings on stock exchanges. Given its size, the restructuring is also widely seen as a litmus test for Dubai's handling of an overall debt load that the IMF estimates at $109bn.
"I still know of a lot of [bond] issues where we don't have the confidence to go to the market," says Nabeel Ali, a senior vice president for institutional banking at Unicorn Investment Bank in Bahrain. "Neither the issuer or the adviser has the guts to go to the market yet." Few observers are willing to guess when Dubai World might seal its restructuring deal, but many say it is likely to come in a matter of weeks or months - certainly not years. For analysts, traders and bankers eagerly anticipating an economic recovery in the Gulf, a resolution could not come quickly enough.
Even if Dubai World inks a speedy and successful restructuring, though, there is no guarantee that such external factors as Greece's recent debt crisis will not continue to weigh on investor confidence in the region. Analysts are also carefully watching Dubai Holding, which recently hired accounting firms to evaluate the financial health of two subsidiaries. "We are truly a global village now," Mr Ali says. "If there's a rumour about Greece, the whole market gets affected even if we have nothing to do with Greece. In the Middle East, if something happens in Dubai, the whole market shivers."