For many years, “restructure” was a word little heard in conversations among those operating in Dubai business circles.
“Boom” was more likely to be used in reference to the emirate’s borrowing-charged growth.
That changed in November 2009 when Dubai World roiled global markets by requesting a standstill on payments, leading to the restructure of about US$25 billion of debt. From then on, restructure firmly entered the emirate’s lexicon.
The deal, which was struck in 2011, acted as a watershed moment, tempting several other indebted government-owned companies to seek to renegotiate loans with creditors to avoid default.
Last week, Dubai Group signed a restructuring that closed the chapter on one of the last large overhangs from the emirate’s 2009 debt crisis. The company, owned by Sheikh Mohammed bin Rashid, Ruler of Dubai and Vice President of the UAE, signed a $6bn debt agreement with all financial lenders regarding the restructuring of bank facilities. Another $4bn of related party debt has been subordinated to the claims of the bank creditors.
Under the deal, lenders agreed to extend maturity dates to December 31, 2016 for secured facilities and to December 31, 2024 for partially secured and unsecured facilities.
“This successful conclusion is an important milestone towards our future and long-term financial stability,” said Fadel Al Ali, the newly appointed chairman of Dubai Group. “We are confident that this restructuring, combined with the improving market conditions and asset valuations, will provide us with an excellent platform to move forward.”
The agreement is the latest sign Dubai is rebounding from a debt crisis that once threatened to submerge the emirate’s economy.
“Dubai is taking its debt very seriously and is getting ahead of the requisite investor relations,” says Andrew Tarbuck, a partner at the law firm Latham & Watkins. “There is a definite case of Dubai being more open and transparent and people have more knowledge and understanding of how much debt Dubai has.”
Still, the progress Dubai has made will be further tested in the months ahead as the emirate faces about $48bn of debt maturing this year and next, Standard Chartered bank estimated last year.
Among the upcoming maturities are two Dubai sovereign sukuk maturing in November and valued at $1.25bn and Dh2.5bn, respectively.
But the largest maturity this year relates to $20bn Abu Dhabi lent to Dubai at the height of its debt crisis. It includes $10bn owed to the Central Bank and amounts of $5bn each owed to National Bank of Abu Dhabi and Al Hilal Bank.
Bank of America Merrill Lynch analysts said last week they expected Dubai to finalise the refinancing of the Central Bank $10bn bond in the “next month or so”.
In a report in November, Barclays said it expected the entire $20bn to be “rolled over”.
And in May next year Dubai World will have $4.4bn of repayments due related to its earlier restructuring. It has already made steady progress in raising funds with its unit Istithmar World last month selling the Atlantis Hotel in Dubai and its 50 per cent stake in Miami’s Fountainebleau Hotel.
Most analysts expect much of the rest of the debt to be either repaid in full or refinanced at more favourable terms for the companies.
Some companies are even seeking to pay off their debts early. Nakheel said this month it would pay Dh4bn of bank debt due in September 2015 this year as it returns to health. The Government took over closer control of the property developer in 2011 as part of a $16bn rescue plan.
Supporting companies in resolving their debts has been a more favourable economic climate. Officials forecast Dubai GDP expansion this year to reach 5 per cent, a similar level to last year. Stronger growth in the emirate’s key pillars of trade, retail, tourism and logistics is being supported by a recovery in the once sickly property market. Property prices rebounded by 22 per cent last year.
It follows a crash of more than 50 per cent in some places from their 2008 peak.
But obstacles remain. Standard & Poor’s warns the recovery in the property sector is “fragile”, meaning bank credit losses will remain “well above pre-2008 levels” over the next 12 to 18 months.
“We believe the key risk factor to watch over the next 24 months will be developments relating to certain large restructured transactions,” says Timucin Engin, the associate director of financial services ratings at S&P.
“Potential nonpayment of these debts could increase some banks’ provisioning requirements, thereby reducing their profitability.”
Banks have already been hard hit by previous debt restructuring.
Further complicating the debt outlook, several companies are using the more buoyant economy as an opportunity to raise new debt. The Dubai Government and its stable of companies upped their debt levels by $13bn to about $103bn between the third quarter of 2012 and last year, Barclays estimated in a report in November. Borrowing appetite has been further whetted by Dubai’s successful bid to host the 2020 World Expo. As much as $43bn in infrastructure projects will need to be developed in preparation of the event, Deutsche Bank has estimated.
“Potential positive growth spillovers from the Expo should help corporate deleveraging but risks of further Dubai debt accumulation to fund capital expenditure would loom,” warned Bayina Bashtaeva, a credit research analyst at Barclays.
The Dubai sovereign may also be readying for a new issue, forecast Bank of America Merrill Lynch (BAML).
“The issuance of an updated EMTN [euro medium term note] prospectus in November last year suggests the sovereign may use this window of opportunity to issue debt in the near-term, we think,” Jean-Michel Saliba, BAML’s economist covering eastern Europe, the Middle East and Africa, wrote in a research note last week.
Future debt is likely to have to be raised from a broader range of sources in future.
For years, bank lending has been one of the mainstays of funding for the Dubai Government and its companies.
But under new rules announced by the Central Bank in November, banks will be limited in the amount of their exposure to those entities. The caps will restrict the extent of loans to local government and companies linked to them at 100 per cent of the lending bank’s capital base. Banks will have five years to comply with the rules.
The rules exclude marketable bonds and sukuk rated double A and higher, as well as companies that are investment grade, profitable and can service debt obligations from their own resources.
“This creates an incentive for profitable GREs [government-related entities] to consider a credit rating, and for rated entities to manage their business without reliance on government support,” wrote Mr Engin, in a report released this month.
The Central Bank is also considering bringing in new limits on managing credit growth. Such rules should help in controlling debt levels and improving transparency.
tarnold@thenational.ae
