Sunday, December 13, 2009
“OK mateys, now that we’ve sold assets and paid off the creditors the good ship Dubai World is ready to raise anchor and set sail!”
OK, this is a long post so I'll summarize:
1.) I do a VERY sloppy estimate of what the Dubai World liquidation would yield to the Dubai World Creditors
2.) My conclusion is that unless the Nakheel real estate assets are more than 50% overvalued on the balance sheet (admittedly a possibility) there are enough assets to make the creditors whole.
3.) There are significant assets outside the UAE that international creditors could pursue in the event that they felt they were being treated unfairly.
4.) Those assets outside the UAE are large enough to satisfy the sukuk holders but not all the creditors.
5.) My best guess is that Nakheel will be put into default as will Dubai World but once at that stage it will be in the insterests of all involved to negotiate as each will be able to credibly threaten each other with substantially negative outcomes.
6.) I think Dubai is over estimating its ability to insulate it's healthy subsidiaries from the restructuring as its equity in those are its most transparent if not most valuable assets. It is also underestimating the asset sales that will be necessary. Istithmar World for example will probably have to be liquidated entirely.
Well, it’s 6PM in New York City and therefore 2AM in Dubai. The moment of truth is hours away there. Notwithstanding the rebuke given to wallstwtf by investors in Dubai levitating their stock market in anticipation of deal with creditors I think it is important to think about what a liquidation of Dubai World might look like.
This is important even if the government of Dubai does make an offer because whether or not it is accepted by 75% of the Sukuk holders will be determined by what their next best alternative is. That alternative is going to be a liquidation or other form of work out of Dubai World.
So what will happen in the event that Nakheel cannot pay the Sukuk by the end of its grace period on December 28th? The amount due is $4.1 billion because in addition to the $3.5 billion in principal the last interest payment plus an equity kicker are also due as there has not been a Nakheel IPO. Well the trustee, in this case Deutsche Bank, will take actions to acquire the Sukuk Trust Assets. As described in an earlier post these consist undeveloped desert and a non-existent island. As these assets are unlikely to be valued at the $4.1 billion which is due a dissolution event will have occurred and the trustee will activate the Dubai World Guarantee. At which point the Nakheel Sukuk holders will become parri passu creditors of Dubai World with the syndicate of banks with which Dubai World is already negotiating.
At the holding company level Dubai World today has $5.5 billion in debt, this will then be joined by the Nakheel Sukuk holders to make $9.6 billion at the holding company level. Some of the $5.5 billion are revolvers which may not be fully drawn down but given the current state of Dubai World finances I think that’s unlikely. So Dubai World has $9.6 billion in debt a little over half of that is held by six banks one of which it controls, one of which is controlled by the Abu Dhabi Royals and four international banks. The Sukuk holders are a combination of Islamic investors and western institutional investors including some vulture hedge funds. I am not sure what the relative power of the creditors are at the holding company level or whether the 75% approval percentage continues to apply once the Nakheel Sukuk holders become creditors of Dubai World. I’m not sure what the implications of this are but any creditor that feels sufficiently left out of the negotiations can sue the others internationally or sue Dubai World for recovery of their assets so I don’t think any of the creditors can run over any of the others.
First I’ll look at what’s there and then address how likely the bondholders are to recover those assets.
There is a very important distinction between the creditors which are owned by GCC nationals and those which are not in the sense that GCC nationals can own land in the UAE and non-GCC nationals cannot. Given that many of Dubai Worlds subsidiaries are UAE based real estate companies this is an important distinction but only in the case of a disorganized liquidation and a hand over of the assets to the bondholders as some could take ownership and others could not. My assumption is that any local real estate assets that would have to be disposed of would be auctioned off and then the proceeds divided among the creditors.
The more important distinction is between assets which are inside the UAE and those which are abroad as any litigation inside the UAE is not likely to go well for the creditors though they stand a far better chance internationally.
First let’s have a look at the assets of Dubai World starting with those organizations which are most easily attachable in international courts.
Dubai Ports World. DW owns 80% DPW a publicly traded equity on NASDAQ Dubai. As of Friday that stake was worth $5 billion.
Istithmar World. Istithmar World functions as a private equity firm and owns assets all over the world. It is actually somewhat difficult to determine what the value of the equity in Istithmar world is worth. The WSJ reported that it started with $3 billion in equity and using leverage like a PE fund purchased assets worth $20 billion. That would imply that a decline in asset prices of 15% would wipe out the equity. The assets were purchased from 2004-2007 and I think it is not at all unreasonable to assume that the average asset price has declined 15% since then.
This is where the debt structure comes into play. It would seem that none of the debt is held at the holding company level. This means that the debt is all secured by the assets themselves. Depending on what debt covenants there are, DW could theoretically put Istithmar into liquidation and in cases where the asset is worth less than the debt against it you could hand the asset over to the creditors. Where the asset is worth more you can sell it and hand the proceeds over to the parent company. Therefore the value of Istithmar World probably is greater than zero, let’s call it $500 million recognizing that there is probably significant variance associated with that number.
Leisurecorp. This is a developer of golf courses, ski mountains, and marinas as well as a golf course management company and a company that develops golf applications for GPS devices. This company has some assets in Dubai but a great many outside of Dubai and therefore attachable. It seems to not have any debt at the holding company level but it is impossible to know what debt secures individual assets. I have no idea whether this is worth anything. Let’s call it $100 million.
Dubai Energy Resources World. This is a new venture investing in oil and gas exploration in Russia and Nigeria. I’m going to assume a value of $0.
That’s pretty much it for international assets. Let’s see what they have in Dubai.
Dubai Maritime City. This is a project under construction to create a zone focused on the international maritime shipping business as a complement to the role of DPW in global port management. Personally I think this is a good idea but the crisis hit before the project really got off the ground. I think we have to value this at $0.
Drydocks World, this company has $1.2 billion in debt and is described as on a “firm financial footing.” That said it is also in talks with its creditors so it’s not clear what value to assign any value to its’ equity. That said it is probably non-zero. If we assume a debt to equity level of 1:1 we can call it $1.2 billion but let’s haircut that to $600 million.
Limitless. This is a real estate development company with projects in Dubai, Russia, Jordan, Saudi Arabia, Malaysia and Vietnam. It also has $1.2 billion in debt at the holding company level and an unknowable amount at the project level. With real estate assets that are partially completed, given that additional financing will be required to complete them I think the equity value can be assumed to be near zero.
Economic Zones World. This group owns the JAFZA or the Jebel Ali Free Zone, and this undoubtedly is worth something but it also has $2 billion in debt. Given that this is a real estate project lets assume a 5:1 debt to equity ratio to get $400 million and then haircut that to $200 million.
Dubai Multi Commodities Center. This is a commodity trading infrastructure company, that is it runs trading platforms for commodities trading including the DGCX which traded $10 billion notional in November. It once also had a substantial real estate arm that was merged with Nakheel. DMCC has $60 million worth of debt outstanding. My guess is this is marginally profitable let’s call it worth $25 million but it could be worth well more than that as the growth rates are substantial though it’s hard to say how sustainable.
That leaves Nakheel the entity that got us into this mess. If we assume that the Sukuk’s disappear it still has $4 billion in bank loans to the parent company and another $1 billion in a facility to finance the Atlantis on the Palm. There are real assets in there, actual fully developed real estate projects in Dubai as well as two large malls. As of June 30th 2009 it valued its assets at $40 billion and has liabilities of inclusive of the loans and exclusive of the Sukuk of $15 billion. Sounds like $25 billion of equity if we assume the assets are held on the books of Nakheel are marked to market. Given the valuations assumed for man made islands we have to assume that the true number is substantially lower. That’s where the mystery is.
But let’s remember why we are asking this question: can Dubai World pay back its creditors. If the valuations, admittedly sloppily done, are approximate, then to make the creditors whole we only need $3.2 billion more to cover the hole, to do that the $40 billion would have to have a marketable value of $19 billion or so or half of the value at which they are carried on the books. I don’t think that’s unreasonable.