IMF to closely follow Dubai restructuring

The International Monetary Fund closely watches how the Dubai Government will restructure Dubai World and deal with debt coming due.

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The International Monetary Fund (IMF) is closely watching how the Dubai Government will restructure Dubai World and deal with debt coming due, an official said. The statement by the multilateral bank, which also welcomed the Central Bank's decision to open an emergency lending facility for banks, is the latest response by global institutions to the surprise decision of Dubai World to seek a "standstill" on billions of dollars in debt repayments.

"We are continuing to monitor the situation following the unexpected announcement by the Government of Dubai regarding a standstill on the debt of Dubai World and its Nakheel subsidiary, which has had an adverse impact on financial markets," an IMF spokesperson said. "The United Arab Emirates is a strong resource-based economy and we welcome the announcement by the Central Bank of the UAE making available to banks a special additional liquidity facility. We look forward to further clarification by the authorities towards a co-operative mechanism to address the issues between these debtors and their creditors."

The Dubai Government is soon expected to announce details of the standstill it first mentioned late last Wednesday, before Eid holidays began in the Emirates. Sheikh Ahmed bin Saeed Al-Maktoum, chairman of the Supreme Fiscal Committee, said last Friday that the Government would give more further information "early next week". Yesterday, the Central Bank pledged to support local banks and international banks with branches in the country. It said it would extend a special borrowing facility to them to ensure there was enough liquidity in the markets as the Dubai and Abu Dhabi stock markets saw heavy sell-offs today.

The key question investors have is what exactly Dubai plans to do about billions of dollars of debt coming due over the next four months. The Dubai Financial Support Fund said it would be restructuring Dubai World and "intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010". "The market needs to see more clarity from these announcements," said Ian Munro, head of research at MAC Capital. "We need to know what is their strategy for turning the business around."

The first major test comes in just over two weeks, when Nakheel is supposed to repay a US$3.52bn Islamic bond. Repayment on schedule is one of four alternatives being considered by Aidan Birkett of Deloitte, who was appointed the new chief restructuring officer of Dubai World, according advisers to the government. If Dubai World pays back the sukuk, it would solve a problem for the company and its bondholders, and leave open the option of rescheduling bank debt and other liabilities, including bills owed to international contractors. Other options being considered include a scheme to offer bondholders 80 per cent redemption of the value of their holdings, with a similar offer made to bankers. Alternatively, Dubai World could move forward with the plan to seek a general "debt holiday" under the terms of last week's standstill proposal, by which payments would be frozen until May 30 next year with a view to negotiating a rescheduling of all its debts. In the most drastic scenario, Dubai World might embark on a general liquidation of assets, but this is thought to be a remote possibility, as it would impair the value of Dubai World assets.