x Abu Dhabi, UAEThursday 18 January 2018

The facts behind the Dubai World story

What is Dubai World, why does it have problems paying its debt, how much does it owe, and what will its creditors do? Your questions answered -

The Government of Dubai took the global financial markets by surprise on Wednesday by saying it would ask all creditors of Dubai World and Nakheel to "standstill" and extend their loan agreements by six months. The Government, acting through the Dubai Financial Support Fund, has appointed Aidan Birkett, a veteran of Deloitte, as the chief restructuring officer of the company. The news was unexpected because Dubai World said on October 15 that it had completed a restructuring that would eliminate 12,000 jobs and save $800 million over three years, and because members of the Government had previously said the emirate would meet its obligations. An Islamic bond, known as sukuk, with a face value of $3.52 billion (Dhbn12.92) is coming due on December 14, but it is only the beginning. Dubai World is obliged to repay a total of $9bn of debt over the next four months. Below we try to answer questions about the drama, which has rattled global markets.

Dubai World is a large Government-owned conglomerate with interests in everything from ports to property and diamonds. Dubai World has $59bn worth of debt and obligations, according to financial statements. Its most well-known companies are DP World, one of the largest owners of ports in the world, and Nakheel, a property developer that created The Palm islands, The World and The Waterfront.

Dubai World has $8.75bn in direct debt. When this is added to the loans and debts of its subsidiaries, it owes $24.27bn, according to estimates by Deutsche Bank. But when all its unpaid invoices and other non-debt obligations such as land grants are included, the group has roughly $60bn in total consolidated liabilities, according to the company in August.

Dubai World has run short of cash because of the fall in property prices, losses on investments and a drying-up of credit markets. Its ports operation, DP World, is still profitable and is exempt from the restructuring.

In a statement on Friday it pointed to the "need to take decisive action to address its particular debt burden". Analysts expect Dubai World to probably sell some assets and reduce costs in line with its forecasts for future revenues. The Dubai Financial Support Fund (DFSF) administers funds from its $20b bond programme. The Government has said the funds will be allocated to "Dubai's strategic revenue-generating projects". The fund is expected to use stringent conditions designed to ensure that it can repay the money it has borrowed, plus the 4 per cent interest due annually.

The most immediate question for creditors is what Dubai World will do about Nakheel's $3.52bn Islamic bond that comes due on December 14. The DFSF and Dubai World have not elaborated on plans for the sukuk. Nakheel may be able to persuade bondholders to change the terms of the bond by the end of next month, avoiding a technical breach of its payment obligations, its prospectus says. Otherwise, Nakheel will have a two-week window after December 14 to make a payment before bondholders would be entitled to begin legal proceedings to recover their funds. In the case of nonpayment after December 28, the transaction administrator, Deutsche Bank in London, would be obliged to notify bondholders.

Deutsche Bank would then call a meeting for certificate holders to vote on how to handle the situation, the prospectus says. To meet a quorum, there would need to be enough certificate holders to represent more than half of the aggregate amount of the bond. A 75 per cent vote would be needed to pass an extraordinary resolution to either begin enforcement proceedings against Nakheel and Dubai World, or restructure the bond. There are few precedents for non-payment of sukuks and it could be very complex and time-consuming. For each impending debt repayment, the restructuring team would have to negotiate and persuade lenders to agree to new terms, and the company also has a number of contractors and suppliers who are waiting to be paid.

There are no exact matches in history to give an indication of how things will go. Dubai World is a government-related enterprise owned by the Emirate of Dubai, but with some of the attributes of a normal commercial company, like a stockmarket listing (DP World) and a credit rating (Jafza). So it is hard to compare with previous cases of financial hardship. Two analogies have been used in recent days: Argentina went through a sovereign default in 2001 when currency instability led to a run on the banks, ending only when the peso was allowed to float on global markets. The effects were severe, but the Argentinian economy eventually recovered.

Eurotunnel, the Anglo-French infrastructure project, also went through a series of financial convulsions in the late 1990s and early 2000s, mainly due to excessive borrowings to build the Channel Tunnel. The crisis passed when creditors sought and were granted equity control of Eurotunnel. Another possible precedent is General Motors of America, which went into bankruptcy protection during the credit crisis, took large amounts of government aid, and eventually emerged smaller but financially viable.