The withdrawal of three banks from Dubai Group's US$10 billion (Dh36.73bn) debt talks threatens to break an uneasy peace with lenders just as some of the emirate's corporations return to international bond markets.
Many of the emirate's government-related companies, collectively known as Dubai Inc, have had to rely on creditors' willingness to refinance debts coming due this year.
Banks have in recent months helped companies that became heavily indebted during the boom years including Limitless, Drydocks World and Dubai International Capital.
On Monday it emerged that Royal Bank of Scotland (RBS), Commerzbank and Standard Bank had walked away from negotiations over Dubai Group's debt restructuring at the beginning of last month.
While bondholders in Dubai companies have been paid, banks had so far been forced to accept tough restructuring terms, said Ahmad Alanani, a senior executive officer at Exotix, a boutique investor in illiquid debt.
"This latest development shows that there are some cracks in the picture and the banks may not be such willing counterparts after all," he said.
"This is not a concern in the immediate term, but there is no question that the bank market will not be looking so favourably at Dubai risk."
Creditors' patience was increasingly perceived to be wearing thin, said David Staples, the managing director at Moody's Investors Service, which is not involved in the Dubai Group talks.
Banks were resorting to the kind of brinkmanship typically used to force an accord in debt negotiations in western markets, in contrast with the more consensual approach which has so far characterised their strategy towards Dubai companies, he said.
"The next step isn't necessarily clear as to how [Dubai Group] is going to be resolved," he said. "But if what you've been doing isn't getting you anywhere … and you have restructurings that have been dragging on for many many quarters, they're going to have to find a path to resolution."
Dubai Group is part of Dubai Holding, a company owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.
However, among the emirate's government-related companies, Dubai Group is not viewed by Moody's as a strategic asset.
The banks had been unable to reach an accord with the company despite more than 18 months of talks, said a spokeswoman for RBS.
"Unfortunately we did not reach an agreement and can confirm we have stepped down from the coordinating committee," she said. "This decision was not taken lightly as RBS has a strong track record of supporting restructures in the region, but a number of factors beyond our control have led us to consider other options in this case."
Spokesmen for Commerzbank and Standard Bank declined to comment, citing client confidentiality.
"Dubai Group remains fully committed to reaching a consensual agreement with all key stakeholders and believes that this remains an achievable objective," the company said in a statement.
The walkout follows months of successful refinancings for Dubai's government-related holding companies.
Dubai Holding Commercial Operations Group repaid a $500 million bond in January, while DIFC Investments and Jebel Ali Free Zone Authority successfully refinanced a total of $3.25bn of sukuk last month. The three were viewed as the most challenging refinancings that Dubai would face this year.
Last night Drydocks World, a shipbuilding and repair firm owned by Dubai World, said it had received approval from creditors for its $2.2bn debt restructuring proposal, Dow Jones reported.
Limitless, another Dubai World unit, is also moving closer to reaching an agreement on its $1.2bn restructuring after securing financing for a number of "priority projects" in Dubai, Russia and Vietnam.
"Private discussions continue with our lenders," said Rebecca Rees, a spokeswoman for Limitless.
Dubai Group's restructuring had been complicated by two competing groups of creditors, said Zafar Nazim, a credit analyst at JPMorgan.
The current deal would be "very painful" for the unsecured lenders and they may be seeking to negotiate government support, said one lawyer familiar with the talks.
The threat of legal action in another jurisdiction remained possible, he said.
European banks have sold assets in the Middle East in an effort to bolster capital buffers and soften the impact of the euro-zone debt crisis on their profits. RBS sold its UAE retail franchise to Abu Dhabi Commercial Bank in 2010 but has retained its corporate and investment banking business.
Emaar Properties was poised to return to sukuk markets yesterday as it met international investors, following a sale of Islamic bonds by Dubai's Government in April.