Thursday, December 3, 2009

Dubai ledership is psychologically unprepared for what happens next

In my last post I made light of a letter to the FT written by Naser Nabulsi but there is something in it that should be taken seriously as it offers an important insight into the thinking of the people who run Dubai. What you can see from the letter is that the people who run Dubai have no idea of the strength and power of the people who are going to be coming after them and are psychologically ill equipped to deal with what is coming.

An investor group led by New York hedge fund QVT has acquired over 25% of the Nakheel Sukuk and formed a Creditor Committee. It’s pretty early in the game to make any predictions of what is likely to happen next but the litigation history of QVT is a matter of public record. They have been involved in shareholder and bondholder litigation on at least four continents. They have sued over the Eurotunnel, a tender offer for a bank in Kazakhstan, a maker of medical devices in the US, a technology company listed in Australia among others. These guys know how to use the courts. I don’t mean to make them out as invincible supermen, they don’t always win but they do fight and fight hard. In one case where they didn’t get any actual damages they sued to have their legal fees reimbursed and won.

It should also be noted that QVT alone has $8 billion under management, this means QVT by itself is better capitalized than the strongest entity in Dubai World. This is not a plucky upstart taking on the great sovereign. If anything Dubai has the weaker hand.

The governing law of the Nakheel Sukuk according to the documentation is UK law, it is listed in the DIFC and the assets themselves exist within the Emirate of Dubai under UAE law. Assuming that the purpose of forming the creditor committee is to block rather than approve a restructuring of the Nakheel debts litigation could occur in any of these jurisdictions and is likely to occur in all of them. Critically, if the Creditor Committee receives a favourable judgement in UK courts it will be the responsibility of the Dubai Courts to enforce the judgement within the UAE.

This is when it will get interesting. If they abrogate the decision of the UK courts they will send a negative signal about the enforceability of contracts in Dubai. If they do honor a UK judgement then Dubai World will have to honor the guarantee, something which Dubai World is not able and which the Dubai government and Abu Dhabi are not willing to do. If they don’t honor it they’ll have to put Dubai World into liquidation or negotiate with QVT et al as parri passu creditors of Dubai World in a restructuring. I think there will be a strong temptation just to abrogate judgements against the government of Dubai as a shareholder of Dubai World.

This would have two negative effects. The first is that it would be a blow to confidence in Dubai. The second is that it would probably not actually work.

It is my theory that the Creditor Committee for the Nakheel Sukuk led by QVT has no intention of agreeing to the standstill agreement proposed by Dubai. Rather they will use their 25% ownership of the Sukuk to block any restructuring proposed by Dubai and force a triggering of the Dubai World guarantee because the assets of Dubai World are much more attractive than those of Nakheel. Once they trigger the guarantee they become creditors of Dubai World and will either 1.) get DW to honor the guarantee and failing that: 2.) get a judgement in UK court putting DW into default and by virtue of their Nakheel Sukuk will have a seat at the table for whatever they can get in a DW restructuring or liquidation and failing that, 3.) use a common hedge fund technique and litigate in every jurisdiction in which Dubai World has significant assets, and there are a lot, for their seizure to satisfy their claims on Dubai World as adjudicated in UK court.

I hope I’m wrong. The Arab world in particular and the arc of nations from Mauritania to Kazakhstan in general need Dubai. In order for Dubai to meet this challenge the people meeting it have to have a realistic idea of what their problems are and what kind of people they will be facing going forward. They need to come to terms with where they stand in the world.

What you can tell from the Nabulsi letter is that the Dubai business and government community has little idea what is coming. It’s not hard to see why. Keep in mind that what contact the government of Dubai has had with the international financial system has been as a client either as issuer of debt or as a buyer or builder of assets with that borrowed money. A great many people made their careers arranging the debt issuances and asset purchases that are now strangling Dubai. Many of them went on to lucrative careers within Dubai Inc itself. The competition among investment banks to win these deals was intense and so for the most part the government of Dubai has been coddled by its bankers and told what it wanted to hear in order to keep the deal flow going.

There was a time when a Dubai businessman could assert the impossible and receive smiles and nods from his bankers. There was a time when a Dubai personality could publish a letter to the FT or claim in a meeting that Dubai’s debt problems were exaggerated, that it was merely a short term cash flow problem and that the Nationals working with the Ruler and their top international advisors would soon have the matter in hand and they would get the benefit of the doubt. Those days could only last as long as there was money to be made in financing Dubai.

Those days are over. It’s starting to look like what money there is to be made in Dubai will be made by taking it apart not building it up. The financiers who will do the taking apart are a different breed from those who do the building up. What money they make will be taken from Dubai not granted by it. They won’t coddle Dubai or learn its’ ways because they won’t have to, they just have to sue it in jurisdictions where it has more assets than influence.

The game has changed. The sooner the powers that be in Dubai come to grips with this the sooner they can start dealing with it and rebuilding with whatever is left.

1 comment:

Anonymous said...

I guess these folks are going to get a taste of their own medicine!