x Abu Dhabi, UAEWednesday 17 January 2018

For Dubai World, the hard part begins

Insight Dubai World now embarks on the painstaking task of restructuring another $22bn in debt.

With the threat of a multinational battle over the US$3.5 billion (Dh12.85bn) bond of its development subsidiary behind it and a new tribunal created specifically to referee its negotiations with creditors, Dubai World now embarks on the painstaking task of restructuring another $22bn in debt.

The process will undoubtedly involve more painful cuts at the company, which has already announced plans to lay off 12,000 employees and will involve selling off assets not essential to its core business to raise cash, even if it means selling them at a loss. But it will also mean asking creditors to ease its debt burden, extending payment terms and even forgiving debts. If they prove unwilling, Dubai World can now seek the protection of the new tribunal, giving it up to 10 months, and perhaps more, to negotiate with lenders.

"Our hope is that people will want to work consensually with us," a source close to the Dubai Government said yesterday. "But if they don't we now have a very clean and distinct way to effect change that will buy us time." The Abu Dhabi Government on Monday offered Dubai World $10bn in credit to help avert a debt crisis. Some of Nakheel bondholders had refused to accept a proposed delay in payment by Dubai World. To avoid a long and messy court fight that could have prevented restructuring of the group's other debts, Dubai elected to pay off Nakheel's bondholders.

That meant coming up with cash quick and that is where Abu Dhabi came in, agreeing to buy new Dubai bonds, the first $4.1bn of which will settle a bond that matured on Monday at Nakheel, Dubai World's property subsidiary. The remaining $5.9bn will be used to service Dubai World's remaining debts and to pay contractors. But that money is contingent on Dubai World getting remaining creditors to agree to the six-month debt standstill it said last month it would seek.

Dubai World does not publish financial statements and has issued no precise tally of its debts, which has forced analysts to comb through public records to compile their own estimates. But Dubai World has said that its restructuring will apply only to the debts of three companies: Nakheel, another property unit Limitless and itself. The three companies owe a total of $26bn, Dubai World said, which with the Nakheel bond repaid leaves about $22bn.

Of that amount, only two major debts appear to be coming due within the six-month standstill, a $1.2bn loan owed by Limitless in late March and a Dh3.6bn Nakheel bond due in mid-May. The rest of Dubai World's obligations would appear to be paying interest on the other $19.7bn. Dubai World has already undergone a major restructuring effort. In October, the group announced it would cut 12,000 jobs worldwide - roughly 15 per cent of its workforce - and consolidate its property holdings as part of a plan it said would save it $800 million over three years.

Clearly, that was insufficient to service Dubai World's massive debts. Late last month, Dubai shocked global financial markets when it announced that it was appointing an administrator to oversee Dubai World's restructuring. Aidan Birkett, a managing partner in charge of corporate finance at Deloitte, as Dubai World's chief restructuring officer, would ask creditors for a six-month standstill. One of Mr Birkett's first tasks will be deciding which assets to liquidate. While many of Dubai World assets are strategic holdings that Dubai may not be willing to part with, others appear more expendable.

The dilemma is that selling quickly often means selling at a severe loss. And with global asset prices rising as the crisis fades, the temptation is to find ways to hold out for recovery to boost prices. In the meantime, Dubai World will be approaching its creditors about the six-month standstill. Eliminating the Nakheel bondholders reduces that pool to 97 institutions, according to Chavan Bhogaita, the head of credit research at National Bank of Abu Dhabi. But with no breakdown of Dubai World's debts, there is little way of knowing which ones. HSBC is reportedly Dubai World's largest single creditor, having lent by one estimate as much as $17bn to Dubai World, while Abu Dhabi Commercial Bank is reported to have lent it as much as $2bn. The two banks joined Royal Bank of Scotland, Standard Chartered, Lloyds and Emirates NBD in talks with Dubai World earlier this month.

It is unclear, however, how much of those debts are affected by the restructuring. HSBC declined yesterday to comment. It is also unclear whether these creditors are any more willing than Nakheel's bondholders to come to the table. Some analysts have suggested that paying off Nakheel will embolden other creditors to take a tough stance. "Now that this support has been granted, with few public conditions, it is hard to imagine future creditors being happy about taking a haircut when holders of Nakheel's sukuk didn't have to," said Rachel Ziemba, an economist at the economic consultancy RGE Monitor in New York. "Getting the standstill will be difficult I'd imagine." That is when Dubai World can fall back on the new panel of three judges. "The tribunal and the laws that have been created to support it create a framework for a moratorium in the event that they cannot agree contractually with their creditors," said Philip Abbott, a partner at the legal practice Simmons and Simmons in Dubai.

Monday's announcement made clear that Dubai would be able to use the proceeds of its bond sale to Abu Dhabi to service debts during the proposed standstill period. That is aimed at persuading lenders not to exercise options they may have to call in loans if Dubai World starts to renegotiate another, something known in finance as a "cross default". The new tribunal gives Dubai World a way to sidestep such difficulties. The tribunal also offers new assurances to creditors. It employs the laws of the Dubai International Financial Centre as opposed to subjecting claims to UAE courts, where long delays contribute to the nation's low ranking in the World Bank's surveys on the ease of doing business in a location. It also removes any concern that Dubai World could invoke sovereign immunity to claims as a government-owned company.

If the tribunal rules that Dubai World has failed to offer them a fair deal, it can order the company to be wound up. But turning to the tribunal also protects Dubai World. If it petitions the tribunal to submit a proposed debt restructuring agreement, it triggers an automatic 120-day moratorium on debt payments to give it time to draft the proposal. Once the proposal is submitted, Dubai World would be entitled to another 180-day moratorium while it presented it to creditors, Mr Abbott said.

That gives Dubai World the option of unilaterally obtaining a 10-month grace period if its creditors decline the proposal for a six-month standstill. "That's why we took pains to establish this bankruptcy law," said the source close to the Dubai Government, "so we have leverage." @Email:warnold@thenational.ae