Saturday, December 5, 2009

Mistakes in Journalism, mine and Reuters'

OK, first a correction. Now that I have a Bloomberg I can see that what debt there is at the holding company level in Dubai World consists of bank loans and there seem to be no credit default swaps listed on BBG. That doesn’t mean there aren’t any but it means that it’s not likely that hedge funds were able to hedge their exposure to the Nakheel Sukuk with Dubai World CDS. This has two opposite implications for the negotiations. On the one hand the only way for the Sukuk holders to be made whole is through negotiation. They can’t just walk and put Dubai World into default and then get paid out on the CDS. That might seem like a positive from the perspective of Dubai World. On the other hand (or really the same hand) the ONLY way for them to get paid is for Dubai World to pay them or to seize the ex-UAE assets of Dubai World. I think that increases the likelihood that in the event that the Dubai Courts refuse to enforce a judgement against Dubai World international litigation is a certainty.

There have also been some interesting articles in press about this. Most interestingly was one from Reuters quoting Al Tamimi, probably the most prominent corporate law firm in the UAE and for whom I have much respect. Tamimi is quoted as saying that the Dubai assets of Nakheel are probably untouchable and therefore the Nakheel Sukuk holders may recover near zero on their bonds.

I understand why he is saying that. With regard to the law, it is somewhere between very complex and totally illegal for a non GCC national to take possession of Dubai real estate. Additionally there are complexities around seizing government assets in Dubai and it is likely that a court would consider the Dubai government the ultimate owner of the Nakheel assets as it is the owner of the owner of Nakheel (this is the standard GCC courts use to decide whether an entity is ultimately foreign owned or not.) I think is also makes sense for a lawyer whose practice in Dubai to take this line of argument as well. Saying that foreign investors have valid claims and the government may run into some trouble is probably not the way to grow your practice in Dubai but it probably is a good way to find yourself getting a lot of parking tickets at best.

I’m not sure that this is really the best line of argument for Dubai to be taking generally. Right now the crisis is focused on the Nakheel Sukuk because that is what is going to default first. In parallel with that Dubai is probably negotiating with many creditors on many other sub-segments of Dubai World and perhaps even ICD and Dubai Holding. To make a strident public argument about how creditors who have lent money to various Dubai entities are likely to recover zero may induce them to blow out of their bonds for whatever bids they can find, or take whatever deal they can get from Dubai but it is very likely to close international capital markets to Dubai developers on a permanent basis. If Dubai is to maintain it’s infrastructure advantage over its’ neighbours it’s going to need access to those capital markets.

Tamimi limits his remarks to the Dubai assets, and with good reason. The far more interesting issue is what becomes of the international assets. The issues with recovery inside the UAE were probably known to the investors in the Nakheel Sukuk at the time which may be why the Dubai World guarantee was necessary. This is where I think the Reuters article falls short.

If Nakheel does not pay or gives the Trust Asstes over to the sukuk holders and they are worth less than face of the sukuk, the creditors will activate the Dubai World guarantee. If the creditors get a judgement in UK court it may not be enforceable against Dubai World assets in the UAE but in the UK alone Dubai World controls the ports of Southampton and Tilbury. In other jurisdictions similar to UK common law and likely to enforce a UK judgement DP World owns the port of Vancouver, Sydney, Melbourne, Fremantle, Brisbane, Adelaide, and Kwai Chung (HongKong SAR.) Not to mention the ski resorts, golf courses and marinas in the US owned by LeisureCorp and the various stakes held by Istithmar World though many of those are already pledged to other creditors. Another interesting thing they might do is to sue Dubai world in the DIFC, the jurisdiction of the Nakheel Sukuk and the publicly traded shares of DPW. They could ask for the Dubai World Equity stake in DPW as satisfaction for their bonds.

There is an element of suspense in all this. We know that the process for triggering the Dubai World Guarantee is pretty straightforward. We also know that the Nakheel Sukuk then becomes a $3.5 billion liability pari passu with the other creditors of Dubai World. What we don’t know is how will the Dubai World restructuring/liquidation conversations go. I can, however, make a pretty good guess as to how they will not go. The sukuk holders would be crazy to agree to let the stakes in the profitable Dubai World companies and those companies assets themselves be separate from restructuring discussions.

25% of the Sukuk holders can block a restructuring of the Sukuk, so they can also prevent the Sukuk holders in toto from agreeing to an unfavourable restructuring but where the Sukuk holders will stand relative to the bank lenders in discussions at the holding company level remains to be seen. My guess is that once they activate the Dubai World guarantee and Dubai World fails to pay they’ll declare a default and start litigating all over the world in order to pressure Dubai World to pay off or failing that actually seize the assets.


purple said...

Keenly following your blog as I once lived in Dubai!!

chris said...

There is a case on guarantee as stated from Holme v. Brunskill [1878] 3 QBD 495 at p. 505:

The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration… but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.

(What this means is that if there is a variation (modification) which is not consented then gaurantor is discharged. So any rescheduling and followed by a default, could mean a release. The better strategy is not to negotiate and go straight for gaurantee - so the pressure was on issuer to pay up)

Thanks for your colourful insight.