Dubai World’s debt deal marks start of a new era for emirate

In theory, the days of looming deadlines and tense creditor meetings are over, writes Frank Kane.

DP World, the 80 per cent owned subsidiary of DW that is listed on the Nasdaq Dubai market, has played an unremarked but crucial role in the resolution of its parent’s debt problems. Pawan Singh / The NationalShow less

Dubai World has got some closure at last on its debt problems. Unanimous acceptance of new terms for repayment of nearly US$15 billion of debt represents the end of one era in the emirate’s financial history, and the opening of a new chapter in its relations with the global financial community.

Lenders went for the new terms for several reasons: Dubai’s rapid economic recovery from the post-crisis recession; the implicit support of Abu Dhabi; the better terms on offer; and a recognition that lessons had been learnt from the dark days of 2009.

About $2.9bn of debts due to be repaid by September this year will be paid early, while $10bn of borrowings due in 2018 will now be phased over a more manageable period up to 2022. In theory, the days of looming deadlines and tense creditor meetings are over.

The banks, and UAE banks in particular, receive a shot in the arm as Dubai World (DW) debts are moved from the tray marked “non-performing” to the one marked “commercial”. Emirates NBD, DW’s biggest single lender, is a winner, through the reclassification of $2.3bn of DW loans.

The protracted restructuring has fundamentally altered other aspects of business life in Dubai Inc.

DP World, the 80 per cent owned subsidiary of DW that is listed on the Nasdaq Dubai market, has played an unremarked but crucial role in the resolution of its parent’s debt problems. For one thing, the deal last year by which DP World bought Economic Zones World in Jebel Ali from DW, freed up about $3.5bn for the parent, enabling it to meet the early repayment of the 2015 tranche.

Perhaps more importantly, creditors in the second bigger tranche were persuaded to extend the terms beyond 2018 by the offer of DP World shares as collateral for their loans. The terms of the security have not been made public, but DP World’s market capitalisation of $17bn more than adequately covers the debt, so creditors will be comforted.

On the other hand, there is the distant but real contractual possibility that a big chunk of what is arguably the UAE’s most successful company is in hock to international banks if DW fails to meet the new repayment terms. DW must have thought it was a risk worth taking.

Another way in which the DW saga has changed the Dubai business scene is through the use of the special tribunal set up under Decree 57, governing bankruptcy procedures at DW.

The rules were employed skilfully by the DW side in the recent negotiations with creditors. Decree 57 was never actually used, but the mere threat was enough to ensure creditors’ approval for the restructuring. That balance of carrot and stick – with concessions offered to creditors who signed up for the terms early – worked perfectly.

Something resembling Decree 57 should become a permanent feature of Dubai business life, giving the emirate the most modern and efficient corporate bankruptcy system in the Middle East.

Despite these profound changes to the Dubai financial scene, in other ways things are little altered over the past five years. The emirate still has a lot of debt, more than $100bn if all government-related borrowings are aggregated, according to the IMF’s most recent estimate. The process of deleveraging has not really happened in the emirate, as indeed it has failed to take place in the rest of the world. A recent study by consultants McKinsey found that the world is still awash with debt, half a decade after the crisis. Borrowings have been reshuffled and rescheduled, rather than repaid. The same is true of Dubai.

Dubai Holding (DH), another big government investor, has restructured $10bn of borrowings, but there is some doubt the deal with creditors is the real thing. Ratings agency Moody’s says the new terms offered by DH are not “commercial”.

The financial silhouette of Dubai Inc has evolved. DW, DH and Dubai International Capital are no longer the aggressively expansionist borrowers they were five years ago, and it is hard to imagine them becoming so again.

Now Investment Corporation of Dubai stands as the only true, blue chip, sovereign investor in the emirate, proving the ultimate value of strong asset backing.

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