Banks are questioning the source of US$3.5 billion (Dh12.85bn) of fresh funds that form a key part of a restructuring plan submitted to Dubai World creditors last week. While regional markets have responded positively to the proposals, bankers say the plan raises new questions about the emirate's ability to repay debts, even if the bulk of Dubai World loans are rolled over.
On Wednesday, the Dubai Government presented a proposal for restructuring $23.5bn of Dubai World debt in which banks were asked to roll over their loans to longer maturities of up to eight years. The offer has not yet been approved by bank creditors, which were owed $14.2bn at the end of last year. As part of the plan, Dubai is offering $3.8bn of new money, which it said would come "from internal government resources", without elaborating further.
The restructuring plan looked unlikely "to put the total external debt over gross domestic product on a sustainable trajectory", the Morgan Stanley analyst Paolo Batori wrote in a report. Dubai already has $109.5bn of outstanding debt, according to estimates from the IMF. Under a budget approved in January, the Dubai Government expects to run a Dh6bn deficit this year, its second shortfall in a row. That would be equal to about 2 per cent of GDP. This is despite cutting spending by 6 per cent. Morgan Stanley doubted that the rollover of loans would be sufficient for Dubai to put the total external debt-GDP ratio on a sustainable track.
Credit Suisse said the Dubai Government may not have much cash left to fund other unfinished property projects. "Although we believe this may result in a need to issue bonds, the Government said that there is no intention to issue any bonds in the near term," the Swiss bank said. EFG-Hermes said it expected Dubai's fresh capital injection to come from asset sales and cost savings. However, the Egyptian investment bank called the restructuring "better than expected" and said the "preferential treatment" of sukuk, or Islamic bond, holders "could be positive for coming bond issuances as well as future refinancing and restructuring of international capital markets in general".
JP Morgan also warned that the plan may be "negative" because it lacked any explicit government guarantees and, with the Dubai Government merely injecting $1.5bn in fresh money into Dubai World, the conglomerate's creditors would rely on asset sales and dividends going forward. "There is no mention of a government repayment guarantee for Dubai World's bank creditors," Zafar Nazim, a London-based analyst at the bank, wrote in a report last Thursday.
"The Government intends to inject only $1.5bn of cash into Dubai World to support its creditors and working capital commitments. In essence, Dubai World's creditors will be relying upon assets sales and dividends." Morgan Stanley also expressed worries that the restructuring may drag out longer than expected. The bank said hints by Dubai World that the discussions with creditor banks may take a while "can hide lack of consensus on the announced terms, causing potential risks ahead".