A cheer went up at the Abu Dhabi stock exchange yesterday morning when news of Dubai World's long-awaited debt restructuring proposal filtered through to the trading floor.
Stocks up and cheers all round
A cheer went up at the Abu Dhabi stock exchange yesterday morning when news of Dubai World's long-awaited debt restructuring proposal filtered through to the trading floor. "This news, people have been waiting for it for a long time. All the stocks are up, in the green, mashallah," said Sobhi Mohammed, a Jordanian investor who lost a large percentage of his savings in last year's share market decline.
The Government of Dubai has offered to inject US$9.5 billion (Dh34.89bn) of fresh funds into Dubai World, and undertake a multibillion-dollar debt-for-equity swap in proposals to restructure the $23.5bn of debt owed by the conglomerate. The proposals, which have been in preparation since the end of November, would involve Dubai World turning $10.1bn of its debt into equity. They do not involve government guarantees nor any fresh capital from Abu Dhabi, which has already contributed to loans of $20bn for Dubai.
Dubai is also offering to inject $3.8bn of new money into the conglomerate "from internal government resources". Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Supreme Fiscal Committee, said the Government was committed to finding "a fair and equitable solution for all stakeholders in the wider interest of the economy". The Government warned that a deal may take "several months". The proposal will now be considered by creditors, including the 97 banks that are owed most of the debt.
Aidan Birkett, the restructuring expert who led the process, said: "We think this is a sufficiently attractive offer to make it do-able. Now we begin negotiating with the banks, though the fundamentals of the proposal will not change." The proposals do not involve immediate "haircuts" - reductions in repayment of principle loans - but in the long term creditor banks will have to agree to forgo future interest payments. The rates of interest being offered by Dubai World were not revealed yesterday.
"It is not as if one bank can torpedo this," said Jawad Ali, a partner at the international law firm King and Spalding. "If enough creditors sign up to the proposal it will go through, even if there is a small number of dissenters who choose to go to court." Mr Birkett called the proposal "a very attractive deal" and said banks had given a positive response. The deal for Nakheel, the builder of the palm-shaped islands that owes $10.5bn, would mean smaller builders would be fully repaid, while bigger contractors would be repaid 40 per cent in cash and the rest in tradable securities.
Local markets reacted enthusiastically to the proposals. The Dubai Financial Market General Index closed up 4.3 per cent at 1,845.21. Dubai's five-year credit default swap rate fell by 60 basis to 360 basis points, meaning it now costs $360 to insure $10,000 of Dubai sovereign debt. "There was panic in the market and now there is less panic," said John Tofarides, an analyst at Moody's Investors Service.
Ahmed Humaid al Tayer, the chairman of Emirates NBD, the UAE's biggest bank and one of the largest creditors, said: "It's very, very positive." But privately, some creditor banks appeared more sceptical, pointing to what they claimed was unequal treatment of lenders to Dubai World and Nakheel. They also had doubts about Nakheel's long-term financial stability and the lack of specific terms for the newly rolled-over debt.
Under the proposal, the bondholders of two Nakheel sukuk, due in May and next year, will be fully repaid and on time if the proposals are agreed to. By contrast, creditors of Dubai World, who were owed $14.2bn at the end of last year, will be asked to roll over their loans into two tranches of new debt, with five and eight-year maturities. There was no indication of what interest they would be paid, which is one of the key points of forthcoming negotiations.
"Nakheel is an important part of the Dubai economy," Sheikh Ahmed said. "The business plan allows work to continue as soon as possible and puts Nakheel on a sound footing." Long term, Nakheel will cease to be a subsidiary of Dubai World. Another indebted property company, Limitless, was yesterday taken out of the restructuring process. A financial adviser to the Government said Dubai World would sell some assets, but not hastily.
"Dubai World is a company with great assets," the adviser said. "There is work to be done and that will include selling companies." The $3.8bn of new Dubai cash will come from the continuing operational cash flow of Dubai entities, he said. Economists called on investors and bankers to pay more attention to the Dubai Government's debt and the emirate's ability to pay it off in the future. According to the IMF, Dubai already has $109bn of debt.
"Dubai has boosted confidence in Dubai and there is no doubt in my mind that they are doing that," said John Sfakianakis, the chief economist at Banque Saudi Fransi. "But that does not mean that people will forget that the sovereign is accumulating more debt." @Email:email@example.com firstname.lastname@example.org