Banks may be getting short straw

Contractors and other trade creditors owed more than Dh500,000 by Nakheel are to receive 40 per cent in cash, with the remainder in the form of a tradable security, potentially a bond.

The banks owed money by Dubai World may be getting a harsher deal than creditors of its property subsidiary Nakheel in a proposed restructuring of US$23.5 billion (Dh86.31bn) of the conglomerate's debts. Contractors and other trade creditors owed more than Dh500,000 by Nakheel, the developer that built Dubai's Palm islands, are to receive 40 per cent in cash, with the remainder in the form of a tradable security, potentially a bond, carrying interest "at a commercial rate".

Investors in two of Nakheel's Islamic bonds due for repayment in May and next year, meanwhile, are to be repaid on time and in full, according to the proposal. In contrast, banks that lent money to Dubai World are to have their loans replaced with two chunks of new debt maturing in five or eight years. The company has not said in its proposals what interest rates on that debt would be. "Nakheel is an operating company with trade creditors and customers, and the interest rate reflects the importance of Nakheel and getting cash to trade creditors in the wider interests of the Dubai economy," the Dubai Government said yesterday.

Dubai World, by contrast, "is a holding company with assets that the banks lent against and their realisation is based on these assets", it said. "Without government support, Dubai World would not be able to pay any interest at all." Bankers and analysts said the different treatment of creditors of the holding company and those of Nakheel could drive a wedge between Dubai World and banks as they consider the restructuring proposal.

Even if Dubai World's creditors are offered commercial rates of interest, they may look askance at an extension of maturities that comes with no initial cash payment. And the Dubai World creditors' restructured debt would not be tradable, unlike the listed bonds to be issued to Nakheel's large trade creditors. "To me the trade creditors are getting a slightly better deal because they're getting 40 per cent up front and the other 60 per cent is tradable," said Deepak Tolani, an analyst at Al Mal Capital in Dubai.

Dubai World also revealed yesterday a lower total debt restructuring figure, $23.5bn, than the $26bn that had been widely reported. A Dubai World spokesman said the number was reduced because Limitless, another property subsidiary, was excluded from the restructuring. Subtracting the $8.9bn of funding provided by the Dubai Financial Support Fund (DFSF), an entity established to receive and distribute aid to state-owned companies, creditors of the holding company are owed about $14bn, Dubai World said.

The DFSF, which has received $20bn in funding from the Central Bank and the Abu Dhabi Government, is proposing to convert the $8.9bn of injections it made into Dubai World in the form of loans into equity, effectively erasing that debt. In addition to the five-to-eight-year restructuring plan and the equity conversion, Dubai World also said yesterday the DFSF would pump as much as $1.5bn in cash into Dubai World to finance the company's operations and help it make interest payments on the newly restructured debt. The company also reiterated that an ad hoc tribunal established in December at the Dubai International Financial Centre was available to creditors and the company to process claims.