Dubai World changes tack on debt

The company hopes to win an agreement from creditors to restructure as much as $22bn of borrowing without a standstill deal.

Dubai World is hopeful it can win a deal from creditors to restructure as much as US$22 billion (Dh80.81bn) of debt without necessarily formalising a standstill deal. As dozens of accountants sift through Dubai World's financial records in a race to determine how best to restructure its debts, the company appears to be pursuing a new strategy to make sure it can win a deal from creditors before facing any major repayment demands, according to sources close to the company and its banks.

It now hopes to convince creditors to agree on how to restructure its debts before an April 30 deadline without necessarily first getting them to sign a standstill agreement on debt repayments. "A standstill is nice to have, but it's not essential," said a source close to Dubai World. Getting a standstill agreement from creditors has been a key condition of Dubai World's restructuring efforts since November 25, when the Dubai Government appointed an outside accountant to run the process. A standstill would essentially prevent creditors from declaring Dubai World in default if it missed a payment while it was still negotiating a restructuring of its debts.

But with Dubai World's lenders already working closely with it to assess its financial health and the company using government funds to make sure they receive timely interest payments, Dubai World hopes a standstill agreement might no longer be necessary. Eliminating the insistence on a standstill agreement would remove a significant hurdle in the eventual rehabilitation of one of Dubai's most important companies.

Dubai World's latest troubles complicate Dubai's efforts to recover from the financial crisis, and resolving them is seen as key to restoring investor confidence in the emirate. "Dubai has to be conscious of the fact that how it resolves its current problems and how it deals with its creditors will mean a great deal to the Dubai brand, its reputation and how it secures investment from overseas in the future," Lord Mandelson, the UK business secretary, said in Dubai earlier this week.

British banks are owed an estimated $5bn by Dubai World, so the creditors committee is led by HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered Bank. The creditors committee has assigned accountants from KPMG to work with Deloitte and its debt specialist Aidan Birkett - whom Dubai appointed in November as Dubai World's chief restructuring officer - to untangle the mess at the conglomerate. A similar effort is being conducted by advisers to the Dubai Financial Support Fund.

It is a mammoth undertaking. Dubai World has at least 12 subsidiaries and controls at least 78 other units, all of which combined have at estimated $33bn in debt, part of roughly $56bn in overall liabilities. The company has excluded its port operations and free zones from the restructuring, however, leaving just $22bn of debt up for negotiation. The group's intricate network of joint ventures and other investment links complicates the efforts to value its assets, a necessary step in determining how much it can repay. So far, accountants have turned up more than 1,000 entities that are in some way affected by Dubai World's restructuring, according to a source close to the Dubai Government.

Until the accountants arrive at a meaningful estimate for the value of Dubai World's assets, it appears that no restructuring plan can be finalised, a banker at one of Dubai World's creditors said. In the meantime, he said, Dubai World and the creditor committee have been holding meetings or conference calls at least once a week. That kind of co-operation appears to be behind Dubai World's hopes that it can win a restructuring deal without getting a standstill agreement first. Efforts to obtain a standstill agreement have run into headwinds from bankers who oppose the Dubai Financial Support Fund's insistence that its loans to Dubai World subordinate their own.

Dubai World still has a trump card in negotiations with its bankers. In December, Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, established a tribunal specifically for dealing with any disputes over Dubai World's debts. If the company and its creditors reach an impasse, Dubai World can submit its restructuring to the tribunal, which under the terms of the decree establishing it, would give it up to 10 months and possibly longer to negotiate with creditors.

* additional reporting by Asa Fitch [e-mail] [e-mail]