x Abu Dhabi, UAEWednesday 24 January 2018

Dubai World may offer new debt to creditors

Dubai World is working on a plan to issue new tranches of debt to creditors in its proposals to restructure US$26 billion in loans.

Dubai World is working on a plan to issue new tranches of debt to creditors in its proposals to restructure US$26 billion (Dh95.49bn) in loans, say bankers close to the situation. The plans, which are still to be finalised, were informally put to representatives of the creditors' co-ordinating committee last week and are due to be discussed today with the Dubai authorities.

They would offer creditors the flexibility to select a repayment proposal according to their strategic and accounting priorities. "What they [Dubai World] came back with was not as bad as most banks had anticipated. Under this plan they would refinance several different tranches. Some would come with zero interest and some with reduced interest rates," said one banker present at the informal meeting last week.

None of the proposed new tranches involves an immediate "haircut", a reduction in principal, but all, because of the absence or reduction of interest payments, would mean that the banks forgo future interest income. Under the proposals, Dubai World would offer different repayment terms and interest rate levels to creditors according to the tranche of debt. Among the possible scenarios are: repayment in full over five years but with no interest paid in that period; repayment over seven years with interest at about 2 per cent; repayment over a minimum of eight years with interest paid at close to the one-year London interbank offer rate (Libor).

It is possible other variations on this three-point structure could be adapted according to creditors' appetite for different classes of debt. The proposals require the approval of the governments of Dubai, which is financing Dubai World on an operational basis via the Dubai Financial Support Fund (DFSF), and Abu Dhabi, which is funding the DFSF. It is uncertain whether there will be a government guarantee of the debts under the new proposals.

Advisers to Dubai World believe the new proposals would meet the needs of different categories of creditors among the 97 banks that are creditors of the conglomerate. The co-ordinating committee is dominated by the big British banks owed as much as $5bn, but their interests may diverge from those of the regional banks which also have a big exposure, and the rest of the creditors, comprising small to medium-sized banks from across the world.

"This is indicative of what the final proposal may look like. It is a plausible solution," said a person familiar with the talks. "The company is flagging a series of proposals with a smaller group now. In the end, they have to finalise it with those who are funding it and fine-tune it according to the availability of government support. Dubai World is constantly kicking around proposals as they are devising the final one."

However, the proposals are unlikely to lead to an instant solution to Dubai World's problems. Some creditors will insist on a repayment of their principle loans on schedule. Others would be unhappy at the prospect of taking a significant loss, over a number of years, by agreeing to interest rates lower than normal commercial rates. A standard corporate loan in the UAE now carriers an interest rate of about 5 per cent.

If they get the go-ahead from Dubai and Abu Dhabi, the proposals are likely to be formally scheduled by the end of the month on the accelerated timetable set by Dubai World, which previously set the end of next month to reach agreement with its creditors. The DFSF has agreed to fund Dubai World's interest payments and operational costs until then. If no deal is agreed with creditors, Dubai World has the option of starting bankruptcy procedures in the special court set up by the Dubai International Financial Centre (DIFC).

Recovery of assets via the DIFC Courts would be expensive, drawn out and uncertain, according to legal experts. It is believed the value of Dubai World's assets, currently being assessed by a team under the conglomerate's chief restructuring officer Aidan Birkett, could be less than 50 cents on the dollar in a bankruptcy situation. "Receiving 100 per cent of the principal and zero per cent interest is better than taking a 30 to 40 per cent haircut. On this basis, the banks involved will not have to incur a loss other than the time value of money which is not insignificant but may be better than the alternative," said Jawad Ali, the managing partner of the Middle East offices of the law firm of King and Spalding.

Pointing to restructuring cases involving sovereign debt such as Argentina, Mr Ali said there were many precedents where large global banks accepted the rescheduling of loans at zero interest from government entities. A spokesman for Dubai World declined to comment on the progress of the negotiations, as did a spokeswoman for DFSF. uharnischfeger@thenational.ae fkane@thenational.aea