Saturday, December 12, 2009
A Dubai Architecture Rorschach: is this a one for full recovery or a hand gesture to the bondholders? We'll know in 48 hours.
Nakheel Sukuks traded up Friday on a new rumor that the restructuring would be $0.70 in cash and the balance in newly issued longer dated securities. Given that the Islamic bonds were trading at $0.47 on the dollar that sounds like a good deal so they popped up to $0.55. This is surprising to me for two reasons.
The first is the mechanics of the restructuring. If it is to be voluntary it has to be agreed at a meeting by 75% of the bondholders. No such meeting has been called. The bonds are due to be redeemed on Monday and have a 14 day grace period. The second reason is that if Nakheel has the $2.5 billion in cash that it needs to pay out the cash portion wouldn’t it have been wiser for the parent company to sell some of their DPW equity and be done with the whole thing rather than extend the maturity or to have DPW pay out the $3 billion on its’ balance sheet to shareholders and then turn around and pay that out to the Sukuk holders? No dividend has been announced. What gives? What will happen next?
This should all be known in 48 hours so I am a little hesitant to theorize beforehand but I think that whatever deal is announced may be the opening move so looking forward to the likely second moves makes sense.
First of all it is possible that Dubai Inc. may have decided that either a default or a restructuring on the Sukuk would be too costly to them may therefore pay off in full. A number of columnists in the Gulf believe this will happen. To believe that you have to believe that they have the capacity to pay and therefore their standstill request was made by choice not necessity and you have to believe that they have been surprised by world reaction to this and have decided to backpedal, not really their style.
Personally I think this is unlikely because it would involve a massive miscalculation by the powers that be in Dubai as to what the fallout from their standstill request would be. Dubai has a history of believing in near impossible outcomes but even this is beyond them. More likely some private conversation between Abu Dhabi and Dubai about what was an appropriate use of the Dubai Financial Support Fund put Dubai World outside the ring and necessitated this which would imply that there is indeed a shortage of cash to pay out the bondholders.
The second possibility is that the rumors are true that Dubai World will offer the bondholders some combination of cash redemption plus new securities that are longer dated and would give Dubai World or Nakheel some time to sell assets or, if long dated enough, return to profitability. There are some issues with this. Would the new securities also be Sharia compliant as the current ones are? More importantly, what assets would be backing the new securities in the event of a re-default?
This is something the investors will have to look at closely and Dubai World will have to take their concerns into consideration. As of now if the bondholders exercise the Dubai World guarantee they are creditors of Dubai World, an entity with a great many international assets. I’m not sure if that is even possible given that the debt covenants of the Dubai World entities with international assets are likely to be. If the new securities are not backed by attachable assets outside of Dubai then investors will have to weigh their chances of recovery against the government in Dubai which are probably not good.
I mentioned in an earlier post I think even an explicit guarantee by the government may not be enough and if the government were willing to guarantee these debts we wouldn’t have gotten here in the first place. So unless the bondholders receive a substantial amount of cash and new securities backed by attachable international assets I think they will decline. Even if they do, they might decline if the value of the package they are offered is less than they think they are likely to get in a liquidation of Dubai World.
The bottom line is this: Dubai can avoid a default of Dubai World if it offers the bondholders a package of cash and securities backed by assets which they can convincingly seize in the event of a re-default and the sum of the value of the cash and securities has to be greater than the probably recovery of a liquidation of Dubai World.
It is my theory that if that were possible then Dubai would not have called for the standstill agreement before paying off the Nakheel Sukuk. Thus I think far and away the most likely outcome is a default at the level of Dubai World and the bondholders agitating for liquidation of Dubai World until their claims are satisfied. We’ll find out in either 48 hours.
What happens in the case of the Sukuk creditors joining the banks as negotiators of the Dubai World restructuring is a subject for another post.