Having told creditors in November there was no guarantee for Dubai World's bonds, the Government of Dubai has now offered US$9.5 billion (Dh34.89bn) to rescue its conglomerate. It has offered full repayment on time to bondholders, and a carefully balanced carrot-and-stick for other creditors. It is asking banks to take a stake in the long-term revival of the Dubai economy by rescheduling their loans over five to eight years.
As a carrot, Dubai is offering to pump $9.5bn into the company, including $3.8bn from its own vaults. The stick is that the cash is there only if creditors agree to reschedule at what is expected to be below-market interest rates. Almost all of the new cash will go to Nakheel, the property company, and will not benefit creditors alone. It will trickle down through the hardest-hit sector of the economy, reactivating construction sites and reviving the flow of payments throughout the industry.
A revival in the property market could be the spark Dubai needs to reactivate growth across the emirate. Creditors will not accept an impairment without a fight, and some are already questioning the unequal treatment of bondholders and other creditors. Other topics for debate will undoubtedly be the interest rate and security used for the rescheduled debt. But Dubai has gone a long way to appease its creditors. It has subordinated its own claims on the settlement below others and has come up with a sensible framework in which fruitful talks can progress.
With 97 banks involved, there is always a danger that a small minority could scupper a consensus. But only a creditor with no prospect of doing further business in the emirate would hold out against a settlement if a majority of lenders reaches an acceptable compromise. @Email:tashby@thenational.ae
