Long road to Dubai World solution

Dubai World own Nakheel, the developer behind the Palm Jumeirah.

Yesterday marked four months to the day that the Dubai Government entity's debt restructuring was announced, sending global financial markets into a spin. Now the conglomerate's proposal to bankers brings hope that the period of turmoil is at an end. Asa Fitch reports The drama lasted four months but Dubai World's final debt restructuring proposal took a mere few hours to present to bankers and consultants gathered at the Al Murooj Rotana's Al Yasat ballroom in Dubai on Wednesday.

The proposal marked the beginning of a new stage in a tension-filled spectacle that began in November, on the eve of the Eid holiday. In a shock statement, the Dubai Government said its biggest holding company would restructure its business and seek a standstill on debt repayments until May 30. While investors had long been concerned about Dubai's debt, then estimated at US$85 billion (Dh312.2bn), the announcement was a surprise to many.

Dubai World had only weeks earlier announced the conclusion of a restructuring process and earlier that day said the Dubai Financial Support Fund (DFSF), an entity set up to distribute aid to Dubai's state-owned companies, had lined up $5bn in funding from two banks in Abu Dhabi. That new financing, which added to $10bn already injected into the DFSF by the Central Bank in February last year, was initially cheered as proof that the Government was preparing to help Dubai World pay off a $3.5bn Islamic bond due on December 14.

Then the Government made its Dubai World standstill announcement, throwing all of that into question. Aidan Birkett, of the accounting firm Deloitte, was appointed the chief restructuring officer and directed to "address financial obligations and improve business efficiency" at Dubai World. The $5bn bond, the statement said, was "not linked to the restructuring of Dubai World" and was meant "for the general purposes of the DFSF".

The moves may have been planned to coincide, much in the way US government officials orchestrated the merger of Bank of America and Merrill Lynch on the same day in 2008 that Lehman Brothers filed for bankruptcy. The mix of good news and bad was meant to prevent a market free fall, which may also have been the intention with Dubai World. Sheikh Ahmed bin Saeed Al Maktoum, the chairman of the Dubai Supreme Fiscal Committee, said at the beginning of a five-day Eid al Adha holiday in which local markets were closed that the standstill had been "carefully planned".

The restructuring, Sheikh Ahmed said, was happening "in the full knowledge of how the markets would react - We understand the concerns of the market and the creditors in particular." But if the plan was to calm investors, it did not work. The cost of insuring against the default of Dubai sovereign debt climbed by 103 per cent between the day before the announcement and November 27. The price of Islamic bonds issued by Nakheel, the Dubai World-owned property developer responsible for a large share of its debts, declined by 27 per cent. When the Dubai Financial Market opened again on November 30, stock prices dropped by 7.3 per cent.

Asian and European stock prices also fell after the standstill announcement, as investors fretted over excessive sovereign debt and worried that Dubai World's problems might spread. Commentators began to talk about a "Dubai contagion". Ian King, an editor at The Times, wrote in a column on November 27 about "the potential revival of a phenomenon which was last seriously discussed when Lehman [Brothers] went under last year - contagion".

The restructuring announcement also led credit ratings agencies to downgrade several Dubai-based companies, including the Dubai Electricity and Water Authority and Dubai Holding Commercial Operations Group. Standard & Poor's said the restructuring "represents the failure of the Dubai Government to provide timely financial support to a core government-related entity". When the initial standstill scare passed and talk of a Dubai contagion subsided, Dubai World on December 1 said its debt restructuring would cover $26bn, the first time an amount was mentioned, and that it would only affect a few of its subsidiaries, including Nakheel and Limitless, its two largest property developers.

Istithmar World and its ports operations, including DP World, were explicitly excluded. Those companies, Dubai World said, were "on a stable financial footing". Limitless was also later excluded, according to yesterday's announcement and Dubai World said the restructure would cover $23.5bn. Speculation and uncertainty swirled in the ensuing days as the focus shifted to the fate of Nakheel's $3.5bn Islamic bond, or sukuk, that was due on December 14. Nakheel only had a couple of weeks to repay it, default or negotiate an agreement to delay.

A group of hedge funds reportedly got together and bought a quarter of the debt, effectively forcing Dubai World to pay in full or face a default because of provisions in the terms of the bond. On December 14, Sheikh Ahmed announced that the Abu Dhabi Government had agreed to provide an additional $10bn to the DFSF, in part to fully repay investors in the sukuk. The final repayment amount was $4.1bn because of an additional $600 million delayed until maturity.

"The Government of Abu Dhabi has agreed to fund $10bn to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World," Sheikh Ahmed said. "As a first action for the new fund, the Government of Dubai has authorised $4.1bn to be used to pay the sukuk obligations that are due today." The rest of the money, he said, would be used to continue funding Dubai World's operations until the end of next month, provided it could negotiate a standstill on its debt with banks.

Part of the money would also go towards making good on payments due to contractors, Sheikh Ahmed said. Many contractors had complained in previous months of late payments or non-payment by Dubai World and its subsidiaries. On the same day, Dubai announced the establishment of a special tribunal at the Dubai International Financial Centre to handle the claims of creditors against Dubai World. After the support from Abu Dhabi, which replaced the $5bn of financing lined up in November from the two Abu Dhabi government-owned banks, creditors of Dubai World began negotiations over the standstill.

An initial meeting was called on December 21, and a co-ordinating committee of seven of the conglomerate's largest creditors was soon set up. As talks progressed through January and last month, sources at the banks and advisers to Dubai World said an impasse had been reached over the terms under which the DFSF would inject funds into the company. The DFSF had been providing funds to Dubai World on a commercial basis in the form of secured loans, placing itself first in line among creditors to recover money in the event of a liquidation. But the creditors baulked at the DFSF's plans to continue providing funds in this way.

In part because of the issue of seniority in Dubai World's debt repayment hierarchy, no official debt standstill was reached, and discussions moved to a restructuring proposal this month under a "de facto" standstill. In that informal agreement, banks would not make legal claims for their funds as long as Dubai World continued to pay interest on the debt. In the early part of the year, diplomatic pressure began to increase for a settlement of the restructuring. British diplomats, in particular, emphasised on trips to the UAE that the agreement needed to be "equitable" and banks needed to be repaid in full. UK banks were estimated to be owed $5bn by Dubai World and its subsidiaries.

By last month, details about possible restructuring proposals began to crop up. One suggested that banks would be asked to take a "haircut" of between 30 and 40 per cent on the group's debt, meaning they would be repaid between 60 and 70 per cent of what they lent to Dubai World. Others pointed to the possibility of repaying the debt in full over a number of years, but with low or zero interest. Still others suggested banks would be given a range of options under the restructuring.

The proposal presented yesterday to creditors of Dubai World and Nakheel incorporated some elements of the earlier suggestions, but turned out to be far more complex than had been expected. Banks owed money by Dubai World were given full repayment in two tranches of new debt maturing in five and eight years, while banks, investors and trade creditors of Nakheel received a range of terms, including full repayment of sukuks due in May and next year.

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