Bankers in London and the Gulf are divided over how Dubai should restructure the $26bn debt pile dogging its flagship holding company, leading the emirate to consider parallel offers in an effort to please all, the sources said.
How this “framework of a proposal” shapes up depends largely on how much additional capital the UAE main oil exporter Abu Dhabi is willing to provide its neighbour Dubai, given that Dubai itself has little means of raising cash.
“Support from Abu Dhabi is the missing piece,” said one senior London banker active in the emerging markets. “There has to be a political angle to the possible solution as Dubai World doesn’t have enough to repay the debt out of its own resources.”
State-owned conglomerate Dubai World held informal talks with major creditors, which include HSBC and Standard Chartered.
There is widespread expectation among creditors that Abu Dhabi will ride to the rescue, as it did in December when it helped Dubai avert an embarrassing default on an Islamic bond linked to property developer Nakheel.
A proposal, which is expected in the coming weeks, may include more than two tranches in an effort to meet the needs of the 97 lenders to Dubai World.
Local banks with little lending power may want whatever they can get from Dubai World quickly, while international lenders with big balance sheets can afford to wait for full repayment.
Two of the restructuring options include repayment over three to five years with the principal discounted, and repayment over seven to nine years with no discount. How much of a “haircut” is included on the shorter-term deal depends on how much money Abu Dhabi stumps up.
No real decision on the exact shape of the deal has taken place yet, said one London source.
But once it does, it will only be the opening shot in a long war of words with the final settlement likely months away.
“If they put a proposal out in March, its very doubtful that it will clear 95 lenders’ credit committees by the end of the standstill in April,” said the emerging markets London banker.
“Different voices and different reactions need to be pulled into a common response by the steering committee.”
Creditors are likely to resist any initial proposal with demands for better terms, including some sort of board representation or management control over the borrowers.
“Creditors are in a twilight zone between being a creditor and an equity holder and are looking for enhanced creditor rights. Negotiations will zero in on that particular dynamic,” said the banker.
Dubai utility in bond plan
Abu Dhabi is the capital of the seven-member UAE federation – the world’s third-largest oil exporter – and by far the richest. But it has kept noticeably mum about its plans for Dubai, hard hit by the global financial crisis and burdened by an estimated $101bn in total debt.
Last year’s $10bn bailout is conditional on Dubai World reaching a deal with creditors. About $5bn of those funds have yet to be released.
Dubai exports little oil, but raised its profile internationally with eye-catching construction projects such as the world’s tallest building and palm-shaped islands in the sea.
The fallout from Dubai’s debt crisis is being felt in Abu Dhabi, with Moody’s downgrading seven government-related entities late last week as they did not have an explicit, formal guarantee of government backing.
In a sign of how much Dubai’s own financial power has been curtailed, its state-owned utility Dubai Electricity and Water Authority (DEWA) said on March 10 its planned $1.5bn bond would carry no government guarantee.
DEWA’s plan to issue bonds marks Dubai’s first dip into international capital markets since its debt crisis last year. DEWA had postponed the issue after Dubai World shocked global markets in November, when it requested a standstill on debt linked mainly to its property developers, Limitless World and Nakheel, builder of the palm-shaped islands.
