A Japanese bank has agreed to sell US$100 million (Dh367.2m) of Dubai World loans as the government-owned conglomerate nears a final sign-off on its debt restructuring.
Sales of loans made to Dubai World began last summer, several months before the company reached an agreement with creditors in September to restructure $24.9 billion of debt. The first trade was a $25m slice of a $5.5bn loan sold at 55 cents on the dollar last May.
The loans covered in last week's sale agreement would go for between 60 and 65 cents on the dollar, according to two sources familiar with the transaction.
"There's a fair amount of risk in buying these instruments, so it'll be primarily hedge funds buying this," a source in London said. "There is interest, though, because there isn't much in the market in terms of such distressed paper. Hedge funds that specialise in buying special situations are on the lookout."
While the terms of its restructuring have been agreed to, Dubai World has not yet given banks final documents to sign, which would make the deal official. The restructuring calls for Dubai World's bank debt to be repaid in full with a pair of new loans maturing in five and eight years.
With the restructuring still in the balance, some banks would rather sell their debt at less than its face value than wait for the deal to go through.
"It's deal fatigue," a source in Dubai said. "This documentation is taking so long that it's frustrating everyone."
One source familiar with the transaction said the price that investors were paying for Dubai World loans was high relative to other distressed-debt yields available in emerging markets.
Althouh common in the West, buying and selling bank loans is a relatively new phenomenon in the Gulf. Such transactions have been on the rise, however, as banks look to pare down their exposure to financially troubled companies. A spate of large debt restructurings, including Dubai World's, has driven demand for these trades.
Trading of loans developed in the US in the late 1980s and early 1990s and was at first a tool for banks to get loans that were in default or close to default off their books. It has since developed as a means for lenders to manage balance sheets and control risk in their loan portfolios.
"With distressed loans, you're not certain what the outcome will be and you start thinking, 'Let's take some of it out and sell it'," said Hans Christensen, the chief executive of MJX Asset Management in New York. Mr Christensen, who played a role in getting bank loan trading off the ground in the US, said the move to using debt sales to fine-tune risk for banks was "a normal progression".
In the Gulf, Global Investment House and The Investment Dar in Kuwait, along with divisions of Dubai Holding and several other companies in the UAE and Bahrain, have restructured billions of dollars of debt or are in the process of doing so.
Dubai World must approve last week's sale of $100m of loans before the transaction goes through because of contractual provisions attached to the original loans. It is not clear whether Dubai World will approve the loan sale, and little precedent exists to provide clarity on its policies. A Dubai World representative did not respond to a request for comment.
The loans the Japanese bank last week agreed to sell are old ones that will be wrapped into Dubai World's completed debt restructuring.
The new loans envisioned in the restructuring terms do not yet exist.
