Thursday, February 18, 2010
Dubai announces that an announcement about the Dubai World restructuring plan is imminent. And they mean it this time, not like those other times...
When is suspense not suspense? Dubai World has announced that they will have a restructuring plan to present to creditors sometime in March. I have already written on delays in the negotiations and I don’t really want to focus on them too much. This is a lot of smoke and mirrors and the passage of time will bring it all to light because the debts must be paid and the next repayments are only weeks away.
The delays of the restructuring plan have been blamed by the Dubai World on its complex legal structure. Apparently there are over 1,000 legal entities inside Dubai World and the relationship between them and what they are worth it seems is quite a mystery. So much so that the DMCC, was able to walk out of the group altogether apparently with no compensation to the parent for any funds invested or services rendered, at least none that has been disclosed. Personally if I were in the process of walking my company out from its parent company which was at the edge of default I would probably not write a letter to a US judge urging leniency for my mentor who has been convicted of running a ponzi scheme, but then I’m not the CEO of the DMCC. I suppose it helps that the Chairman of the DMCC is the son of the Chairman of Dubai World. Thanks Dad. Creditors? Drop dead.
Dubai is no longer asking for a standstill agreement because they have been able to make interest payments so far. Whether this would be possible without the $800 million or so left over from the last infusion from Abu Dhabi after the Nakheel Sukuk was paid off is left to the imagination of the creditors. So, for that matter, have the eventual terms of the restructuring. There seem to be a lot of options on the table from haircuts to sliding scales of principal payment depending on term structure. Perhaps a debt for equity swap for the Nakheel Sukuk holders, or maybe a general conversion to zero coupon debt at a haircut but with a sovereign guarantee. Interestingly Dubai World says there will be no asset sales until a restructuring has been agreed. The asset sales by Istithmar and DPW don’t count because they’re not part of the restructuring. I don’t know how that can be true, if the creditors of the parent are going to be asked to participate in a restructuring then all the subsidiaries are part of it. Except the ones chaired by the son of the Chairman.
There seems to me to be only one sure thing among all of the various options on the table: losses. Big ones.
My guess is that a big factor in the delay has been the very disturbing realization within Dubai World that the assets that are inside the company are vastly less than the amount of money that is owed. More disturbing still is that it is probably not at all clear where the money went. I can’t really print all the theories about this that people are sending in to my blog email address but it seems that a truly colossal amount of money went into decorating offices and into marketing. Those things do not have great resale value. I’m sure some of it was taken fraudulently but my guess is that the vast majority of it was just spent on the things that gave the illusion of prosperity at the subsidiary companies. Now the investors will have to take the hit.
I realize that I have largely been critical of the powers that be in Dubai but only half the blame for this is theirs. As far as I am concerned there are no innocents in this tale. The creditors bear just as much responsibility. Not for the frauds and the losses but for a lack of diligence. How is it possible that you lend $6 billion to an organization that has over 1000 subsidiaries and when the music stops takes three months just to count them let alone value them. How do you lend money do a company whose structure is so complex that a major subsidiary walks away from the group altogether and you are unsure of your legal right to challenge it? How do you buy the bonds of a company that is carrying a non-existent crescent shaped island on its balance sheet at a valuation of $3.5 billion?
Easy, because it’s only money and its not yours. It belongs to the shareholders and the depositors and for some of the banks, to the taxpayers. But you, the guy making the loan, you get business class trips to Dubai. You get to stay in five star hotels, maybe you get a helicopter tour of the Jebel Ali Port. You get a big orgination fee and you can pay yourself out of that. The last thing you want is real scrutiny of how this all works, the first thing you want is to do it again.
And if you are the end investor why did you invest your money here in the first place? Because you wanted higher returns. How do you get higher returns? You take more risks by lending to organizations where you don’t fully understand what precisely the risks are. What are the risks? The risks are that if the Chairman takes your money and sets his son up in business with it or that your money is spent on office decorations and London billboards praising the company or is spent buying trophy assets at the top of the credit cycle, you’re probably not going to get all your money back. How much will you lose? That’s what we’re going to find out.
The short answer is “A lot.”