The Government of Dubai has hit back at criticism from some bank creditors that are unhappy with the terms of the US$24.8 billion (Dh91.08bn) restructuring proposal by Dubai World. A source close to the Government said the banks, which were owed $14.2bn of unsecured debt, were being offered previously undisclosed concessions in the form of guarantees and deferred interest payments.
Since the terms of the restructuring were unveiled last week, some bankers have argued that trade and financial creditors of Nakheel, the conglomerate's largest property unit, were being offered more favourable terms than the creditors of Dubai World. On condition of anonymity, a source at the Dubai Department of Finance (DoF) said: "The terms proposed reflect issues such as the different level of security and the legal position of each creditor in each company. Bearing this in mind, they are being treated fairly and equally."
The new terms illustrate Dubai's determination to push through the deal in the face of opposition from some of the 97 banks that are owed money. Privately, sources close to the government are expressing frustration that the banks have not welcomed the deal, which received a generally positive response in international markets. They argue that as their loans are unsecured, they should be grateful to receive repayment of their principal sums, now backed by "payment in kind" interest arrangements and guarantees to make up any shortfall in repayments.
Payment in kind allows for lump-sum interest to be paid at the end of the loan's maturity date, rather than by regular interest payments during the loan period. The "shortfall guarantee" on offer from Dubai World involves making up any shortfall in the value of loans, possibly through a steady programme of asset sales by the borrower in the course of the loan period. Some bankers were worried that if they accepted interest rates less than current market levels they would be taking a large "haircut", or reduction in total repayment packages, over the period of the loan.
Most of the bankers' criticism is directed at the treatment of the two sukuk, or Islamic bond issues, from Nakheel that would be paid on time this year and next if creditors agree. The DoF believes that delaying the sukuk payout, amounting to nearly $3bn, could derail the whole restructuring. Building concerns among banks about the terms of the proposals followed a generally positive reaction in the days after they were disclosed on Thursday.
The shifting mood has caused a mixed reaction in local markets. Stocks on the Dubai Financial Market retreated by 2.5 per cent yesterday after a string of gains. The cost of insuring against the default of Dubai sovereign debt also increased yesterday to 426 basis points, up 6.7 per cent from a low of 399 basis points when the proposals were announced last Thursday. Despite that rise the cost of insurance is still 38 per cent lower than on February 15, when concerns heightened about the restructuring.
The Dubai World debt restructuring began last November, when the Government said the company would seek a standstill agreement with creditors to delay repayment on $26bn of debt. Limitless, another property subsidiary, was excluded from the restructuring in Dubai World's announcement of a proposal to trade creditors and banks last week, lowering the total amount to be restructured to $24.8bn. fkane@thenational.ae afitch@thenational.ae