Sunday, February 7, 2010
It may be time for the Dubai World creditors to get on the hotline with their lawyers and go to Defcon 1.
If I were a creditor of Dubai World at the holding company level I would be getting very very concerned right now. The remaining Nakheel Sukuk holders I think are pretty much done for considering that they have no recourse to the parent and their bonds are collateralized with undeveloped desert land or non-existent islands. The Dubai World creditors though had a fighting chance because there remain some productive assets in the Dubai World group and not least of which are Dubai Ports World and the Jebel Ali Free Zone. DPW in addition to being a going concern is a publicly traded company with attachable international assets which should east the minds of creditors.
I had thought that not too much would happen with the Dubai World saga until we got close to the expiration date for the Limitless debt (no pun intended) at the end of March at which time it is likely that another cash infusion will be necessary in the likely event that not all the creditors will agree to roll over the syndicated loan. The National, an excellent newspaper in Abu Dhabi has two articles in it this weekend that bring the Dubai World saga back to the forefront.
The first thing they report is that the Dubai Financial Support Fund (DFSF) intends to take security against the assets of DW in exchange for contributions it will make toward interest payments. It’s not clear to me what form of security this would take but The National reports that it would jump ahead of the other creditors in event of default.
This is a highly perplexing move by the DFSF. In the first instance I imagine that the understanding of the Dubai World creditors would be that the purpose of the DFSF support would be to make the chances of a subsequent default near zero. What does it say about the conviction of the DFSF that its support will be effective in preventing default that it is demanding that it go to the head of the queue for recovery in event of default? It doesn’t exactly inspire confidence. If you were a creditor of Dubai World why would you agree to step back in line for recovery of your principal to only get some of your interest payments? No you wouldn’t. You would put Dubai World into default and in the event that you were blocked from recovering the Emirati assets you would pursue them in international courts. Why this would not be obvious to the people at DFSF who are negotiating this I also don’t know.
An even harder to understand story and potentially more damaging is the request by the Dubai Multi Commodity Center to have its logo removed from the Dubai World website. Removing the logo is not a big deal, what is more disconcerting is that DMCC now claims that it is not actually part of Dubai World. This must come as quite a surprise to the creditors of both Dubai World and DMCC as every press release I have ever seen by either group describes DMCC as a member of the Dubai World group and they have reported themselves as such to the financial media for quite some time.
I suppose what really matters is what the prospectuses for the loans at the Dubai World holding company level say. If they say that DMCC is part of Dubai World and the DMCC is now withdrawing itself from the balance sheet of the parent company this is almost certainly a breach of a loan covenant by Dubai World. If not then I would be demanding a strict accounting of everything that flowed into DMCC from Dubai World and what compensation Dubai World got in return.
An even stranger aspect of this is that the Chairman of the DMCC and the Chairman of Dubai World are father and son. Surely this need never have made the papers at all.
You would think that given that the eyes of the world are so focused on the handling of the Dubai World restructuring that this sort of thing would not be possible. You’d be wrong. Just ask the Damas shareholders.