The eyeballing with bondholders over the repayment of the Nakheel sukuk last week gives way to a different kind of financial sparring.
Dubai World's banks will be more relaxed than bondholders
Dubai World climbs back in the ring on Monday. The eyeballing with bondholders over the repayment of the Nakheel sukuk last week gives way to a different kind of financial sparring, with more subtle factors at work, as talks begin in earnest on the billions of dollars of debt the company owes its banks. These are obligations of a different order altogether. With the US$4 billion (Dh14.69bn) sukuk repaid, Dubai World is left with many more billions of loans it must reschedule with more than 90 banks around the world. Getting all those institutions to agree will be like herding cats on a football pitch.
Dubai World is fortunate in two respects, however. First, the creditor banks are usually far less aggressive and intransigent than the bondholders, and far more willing to take a conciliatory stance for the sake of long-term business. Most of them are huge global institutions, and the sums at stake are minimal compared with their trillion-dollar balance sheets. The figures seem huge to us ordinary mortals - $22bn in bank loans and unpaid contractors bills - but in the global bankers' world that is small change. HSBC, one of the more exposed of the Dubai World lenders with perhaps $1.5bn at stake, has total global assets of $2,527bn.
The banks can, therefore, afford to take a more relaxed view than the hedge funds and arbitrageurs who ended up holding most of the sukuk, and who, in many cases, were personally invested. They stood to lose millions from their own wallets if the sukuk had not been repaid. I could not repeat - on grounds of taste and the laws of defamation - the threats I heard from New York hedge funds last week when it looked like they would not get repaid.
Nobody sheds tears for out-of-pocket bondholders, but similarly the big global banks will not cry over a few billion rolled over on to the coming year's balance sheets. The co-ordinating committee for the negotiations, the "cocom" in bankers' parlance, is dominated by the big lenders - RBS, Standard Chartered, Lloyds TSB and HSBC representing international banks, and Abu Dhabi Commercial Bank and Emirates NBD talking for the regionals. That there are no big US banks at the top table is surprising, but that also makes the process more manageable.
The other factor that may speed negotiations is that there is something of a template already in existence. Little noticed in the frenzied run-up to the Nakheel sukuk deadline was news that Global Investment House (GIH), the Kuwaiti financial institution which defaulted in late 2008, had agreed a financial restructuring with its creditors that allowed it to get on with its investment banking and asset management business.
The comparison with Dubai World is by no means a perfect match. The numbers are of a different magnitude - GIH defaulted over non-repayment of a $200 million facility, it had 54 banks to deal with, and in the end the final settlement involved some $2.1bn debt rescheduled. Small stuff compared with Dubai World. And there were few troublesome trade creditors complicating things by wanting to get their multi-billion bills paid immediately.
But the similarities are compelling too. It was the first ever default in the region, it was the first to have an Islamic element, and it was the first settled via a commercial process, that is, without recourse to government intervention. Dubai has made it clear that there will be no government support in the Dubai World situation. A team from HSBC put together the strategy for settlement. Neil Goldie-Scott, the head of the bank's restructuring unit, explains the basic principles: "From the outset, we determined three essential elements. We would continue to pay interest, we would promise to repay the principle in full, with no 'haircut', and we would treat all creditors equally."
With those basic tenets set early on, the bank manoeuvred around the rocks and shoals of financial restructuring. The volatility of the Kuwaiti political process, with regular stand-offs between the parliament and the ruler, sometimes presented challenges to the process (but this will not be a factor in Dubai). Early pressure from regional Islamic banks to be treated differently had also to be firmly resisted. In the end, after a year of tough negotiating, a settlement was agreed.
Monday's meeting in Dubai will probably kick off with dramatic confrontations between the company and its creditors, but much of this will be posturing. The real progress will be made in private and discreet talks in the months to come. If the lessons of GIH are learned, the process will be a lot less bruising. @Email:email@example.com