Monday, December 7, 2009

Opening Moves

So the two sides in the Nakheel/Dubai World debt saga have made their opening moves.

Not too much to report from the investor side. They have met and as this blog had predicted seem to be taking an aggressive stance with regard to turning aside the Sukuk Trust assets and seeking to enforce the Dubai World Guarantee. There has been no official comment from the investor group or from their attorneys.

On the Dubai side there have been several moves. The first of course was to halt trading on NASDAQ Dubai of the Nakheel sukuks. In my opinion this was a mistake because it communicates fear to the markets. Also if this has in fact fully stopped trading it means that the only people who are long the bonds are long from much higher and therefore are likely to demand something close to full payment. On the other hand it’s likely that since the bonds are held in Euroclear that the move was completely fruitless and the bonds continue to trade OTC with settlement in Euroclear. There's nothing worse than a symbolic gesture that provides a negative symbol but does not actually achieve the original objective.

Dubai World has begun talks with the banks that hold debt of DW at the holding company level. It is unclear to me how much progress can be made on these talks given that they are likely to be joined as creditors by the Nakheel Sukuk holders, more on that in a moment. The talks have begun and are cordial. Far more important is the announcement this morning that Dubai World will consider selling assets. This is absolutely essential and I think a very positive step forward largely because it demonstrates that Dubai is coming to terms with its’ predicament.

I think Dubai made an error when it did not distinguish between the various kinds of creditors it had. It is an entirely different matter to negotiate with Banks than with hedge fund investors. By announcing the debt standstill request before the Nakheel Sukuk redemption Dubai put itself in the sights of hedge funds and now vulture funds which are expert at using the courts to get assets or at least pressure the debtors into concessions. Banks, which are playing a longer term game, are more likely to negotiate and accept Dubai’s terms. I think that Dubai would like to sell assets and pay off the Sukuk holders and then negotiate for time with the bank lenders. That would be a windfall for the hedge funds who bought the bonds late but puts Dubai in the strongest position.

There are issues with that. The best assets are in Dubai Ports World which is a publicly traded company. In order to remit the proceeds to the parent company DPW would have to sell assets and pay dividends some of which would have to go to the public shareholders who, for their part, probable intended on being long term holders of those assets rather than the recipients of the proceeds of an asset liquidation sale to bail out the majority owner. Also a lot of the assets listed in the press are actually encumbered by prior mortgages or, in the case of equity stakes, collar trades.

It’s early going but I’d say that things are looking up for the Sukuk holders and maybe even Dubai.

1 comment:

Anonymous said...

Am guessing the Sheikh got the tacit approval from the powers that be in Britian. I am sure the timing of the standstill announcement and his visit there is no coincidence.