The complicated but lucrative world of restructuring

Dubai World holds 80 per cent of DP World, worth nearly $9 billion, but it is unlikely to offload any of its shares. Enric Gracia / Bloomberg News

They are tricky affairs, corporate restructurings. No sooner have they apparently been nailed down and signed off, when circumstances change and you have to start all over again.

The dynamics between the corporate and its creditors are complicated enough, with dozens, perhaps hundreds of lenders negotiating over a myriad different kinds of debts.

Market conditions are always in the background, with the unpredictable capacity to throw the process off track by changing valuations, interest rates or terms of trade.

When you throw into the equation - as often happens in the UAE - a government-related entity as one of the stakeholder parties, with its own particular interests and priorities, it makes any restructuring a truly moveable feast, subject to vagaries and variables at any stage of the process.

Take, for example, the long-drawn out restructuring of Al Jaber Group. The Abu Dhabi conglomerate, best known as an infrastructure contractor with a workforce of up to 60,000 people, has been in talks with creditors since late 2010 about debts it found impossible to service.

Many companies were in the same position back then, of course. When the corporates had exposure to government contracts, at a time when governments were cutting back expenditure in the newly harsh economic conditions, their problems were all the greater.

But when the restructuring experts scrutinised Al Jaber, they found complications. Straightforward bank debts, in the form of loans and overdrafts totalling about US$2 billion (Dh7.35bn), were accompanied by another form of financial liability in the form of performance bonds and guarantees that raised the total to as much as $4.5bn.

Furthermore, and to demonstrate the capricious nature of the restructuring process, some creditors had seen their exposures jump alarmingly.

Al Jaber did a lot of business with Japan, and used financial instruments to hedge its foreign currency exposure. The Japanese earthquake and tsunami of March 2011, and resulting financial crisis, made a nonsense of these hedging calculations, hugely increasing some creditors' exposure.

No wonder the Al Jaber restructuring has taken so long. The good news is that progress has been made in recent months and bankers should be in a position soon to consider proposals for repayment - unless another unforseeable event occurs.

The template for restructurings in the UAE was the Dubai World (DW) situation in 2010, but the way this has worked out since demonstrates once more the restructurers' vulnerability to external conditions.

Back then, repayment of DW's total debt of about $25bn was rescheduled on a timescale between five and eight years ahead. It was complicated by the presence of property group Nakheel as a major debtor within DW, but that in essence was the deal.

Debts would be repaid, beginning 2015 and going on until 2018, at rather less advantageous terms to creditors, but the banks took the view that it was better to get some money back then and put the whole affair behind it.

Nobody expected DW entities to generate enough cash to repay $25bn, even in the most benign economic environment, so asset sales were planned from the outset. Some have come through, at significant losses to DW it must be said, but nowhere near enough to begin chipping away at the debt mountain. Now DW faces the first repayments in less than two years, and unless asset values recover unexpectedly and extraordinarily in that period, it will have to begin the restructuring process all over again. The restructuring profession is licking its lips at the prospect.

Incidentally, there is one DW asset that could be sold and would transform the situation: it holds 80 per cent of the listed ports operator DP World, which is worth nearly $9bn.

But there appears to be no appetite from the government-related owner to sell any of its shares, perhaps on the principle of not wanting to throw good money after bad. Such are the complications of having a government stakeholder.

So the restructurer's lot is not a simple one. No doubt the lucrative nature of the compensation makes it happy though.