Thursday, December 10, 2009

Shiekh Mohammed, the Nahkeel Creditor Commitee is here for their 3 c'clock



I am very interested to hear what Nakheel and Dubai world are going to put on the table for the Nakheel Sukuk holders. It sounds like there are a few ideas being floated. One of them is to issue new bonds with a longer term and with a principal haircut of between of perhaps 30% or 40%. There is also the idea floating around that the new bonds could include an explicit Dubai government guarantee.

Imagine the restructuring advisors for Dubai called up a Sukuk holder and said, “hey listen, we need you to take a 30% haircut on your principal and instead of getting it back this month, you’ll get it back three years from now but don’t worry now the Dubai government is _explicitly_ going to guarantee it. What do you say?”

The sukuk holder might have a few questions starting with “Ummm.... wait a minute. These Dubai government guys, aren’t they the same guys who had been implicitly guaranteeing these things before? Oh I know it wasn’t in the documentation but those guys over at Nakheel and the salesguys at our BankXYZ used to always wink and nod about that. It’s part of the prestigious government owned Dubai World Group they would say and smile knowingly. And then they yanked the rug out a couple weeks back."

"Oh, and aren’t they the same guys who have been telling me and all the world for the past year that we don’t have to worry because of their strong relationship with Abu Dhabi and that the Dubai real estate market had turned around? That didn't really work out so good either did it?"

"So they want to offer me an _explicit_ instead of implicit guarantee this time."

Well let me think. What assets do they have? Assets in Dubai you say? Who controls the courts that will be awarding me those assets in event of default? They do? Gosh, didn’t I just read a few days ago on Reuters that it’s almost impossible to recover Dubai assets against the Dubai government? And to get this I have to give up my claims on Dubai World. Ummmm.... NO.”

Instead they might say something along the lines of “I’ve got a better idea, why don’t we put Dubai World into liquidation sell its’ UAE assets at an auction for GCC nationals and liquidate its’ international assets. Don’t like it? I’ll do it myself through the courts system. I'll make it as public as possible and any time the Dubai courts don't honor an international judgement I'll issue a press release about how terrible a place Dubai is to do business. Actually, maybe I'll say the Emirates instead of Dubai. Maybe then I can get Abu Dhabi to step in and pay off.”

This is the problem, Dubai has damaged it's credibility to the point that even a Dubai guarantee might not be enough. Take for example the DEWA downgrade yesterday despite the fact that it _had_ an explicit guarantee. So the creditors dont have any leverage until they put Dubai World into default. Before that they have no incentive to negotiate.

The whole thing kind of reminds me of one of my favourite passages from Goodfellas.

Now he's got Paulie as a partner. Any problems, he goes to Paulie. Trouble with a bill, to Paulie. Trouble with cops, deliveries, Tommy... he calls Paulie. But now he has to pay Paulie... every week no matter what.

"Business bad? F*ck you, pay me. Had a fire? F*ck you, pay me. The place got hit by lightning? F*ck you, pay me."

Also, Paulie could do anything. Like run up bills on the joint's credit. And why not? Nobody will pay for it anyway. Take deliveries at the front door and sell it out the back at a discount. Take a $200 case of booze and sell it for $100. It doesn't matter. It's all profit. Then finally, when there's nothing left... when you can't borrow another buck from the bank... you bust the joint out.

You light a match.


Or in this instance, you litigate. Let's see what happens.

1 comment:

Shaz said...

Ken, I don't really know enough to add anything to your analysis, but I dig the movie references. I was just watching part of "Casablanca" to procrastinate during finals...