Dubai to take a hit on debt exposure

The Dubai Government "will take its share of any exposure" in the financial restructuring of Dubai World, said a person familiar with the talks between the conglomerate and its bank creditors. In particular, the Dubai Financial Support Fund (DFSF) will not, for the time being, seek to enforce a claim to be top of the creditors' queue in negotiations over Nakheel assets, he said yesterday.

That stance, which involved the DFSF assuming preferred creditor status in return for cash injections to keep Nakheel operating, had been seen as an obstacle to progress in the talks about Dubai World's debts of US$26 billion (Dh95.98bn), including $4.1 bn owed to the DFSF for repayment of Nakheel's sukuk last December. "We want international banks to be involved in the long-term future of Dubai, so that means helping them get the best recovery possible," said the source, who declined to be identified because the talks are private. "If it will be at the expense of the Government of Dubai, then so be it. That stops short of saying they [the banks] will get full recovery, but it means the Government will take its share of any exposure. "We are in the pool of unsecured creditors, even though we continue to put cash into the company, but that cannot happen forever. Funding the company indefinitely on an unsecured basis is not sustainable."

Suspending the claim to preferred creditors status, while maintaining cash injections for the operational costs of Dubai World's restructuring, could be interpreted as a concession to bank creditors, who were angered by the claim and by reports that Dubai World was planning to offer them 60 cents in the dollar over seven years. The 60 cents report was denied again by a senior government official. "There are still a couple of steps to go before we complete a Nakheel business plan and Dubai World financial evaluation analysis," the official said. "Then we will be in a position to put proposals. There have been no proposals yet."

The person familiar with the talks elaborated on the role of the Central Bank and Government of Abu Dhabi in the restructuring talks. "They are part of the dialogue, like many other constituent parts of the UAE. When the time comes for a proposal, nothing in it will be a surprise to Abu Dhabi. We are trying to build consensus along the way," he said. The Abu Dhabi Government intervened in the Dubai World situation last December with an injection of $10bn of bonds that enabled Nakheel to pay a $4.1bn bill for a sukuk Islamic bond. Some $4.9bn of that total sum has been spent, the person said, with the balance still available for the DFSF. "The $10bn will be enough because it has to be enough," he said.

"It is akin to Greece. If the EU just bailed out Greece, it would be like throwing good money after bad." The government official said international and regional banks would be treated equally in the restructuring process. "Not only do we need the international banks, but the banks also need us in Dubai," he said. "This is where a lot of business takes place. Dubai will be judged on whether it is a fair and equitable process or not. The banks have got to be treated fairly and be seen to be treated fairly."

He said that by 2012, Dubai would have finished big infrastructure projects such as the Metro, funded by the Roads and Transport Authority, and Al Maktoum International Airport. He estimated these projects accounted for 40 per cent of Dubai's budget, so that amount would be freed up to fund future growth. Both the person familiar with the talks and the government official were confident that a restructuring deal could be achieved relatively quickly. The source estimated "a couple to four months" for a comprehensive deal. "Dubai needs some sort of closure on this. It is not advisable to be in limbo forever," he said.

If a deal cannot be reached on restructuring, Dubai World could be forced into a liquidation process via the emirate's new bankruptcy laws. The next significant date in the process is May 15, when Nakheel has another sukuk to repay, this time for $3.6bn. The first restructuring proposals are expected some weeks before that. The source said Dubai World was at a "de facto" standstill, in which banks had rolled over requests for repayment of principle sums in exchange for continuing interest payments and cash injections from the DFSF to keep the company going on an operational basis.

"What we want is a maximum recovery for all the people around the table, and the proposals when they come will contain a range of options, for example if a creditor wants to stay in Dubai World for a longer time, that could be done," the source said. [e-mail]