Monday, March 8, 2010
Bring on the Creditors! Let the games begin!
The FT reported last night that Dubai World executives are in London this week presenting their proposals for the Dubai World restructurings to the various creditors of Dubai World. This is the opening move what is likely to be the final act in the Dubai World saga. Nothing has been communicated to the public but the possible structures of the restructuring have been fed to the press and commented on in this blog and others. They are generally that the terms of the proposal may include some or all of the following: extensions of term, haircuts, government guarantees, securities swaps. It is also likely that there will be choices between degree of those things such as those who accept longer terms have greater return of principal and perhaps a government guarantee. I have no idea or special insight into what will be proposed or what will transpire but I want to point out a few things that might be helpful as the drama unfolds.
For all their outward unity Dubai and Abu Dhabi have very different objectives in resolving the crisis.
It’s like the roles of the chicken and the pig in making your breakfast of bacon and eggs. The chicken is involved, the pig is committed. For Abu Dhabi this is an exercise in reputation management, for Dubai it is life and death. In the event of a a litigious liquidation of Dubai World Abu Dhabi will be deeply embarrassed. Dubai would be destroyed by that outcome, even if the parent company were saved but there was a messy unwind of one of the subsidiaries that threw into question the security of creditors in Dubai. This is because this would likely shut the capital markets to Dubai and its infrastructure based development would grind to a halt.
All Creditors are not created equal.
The creditors will have varying degrees of power relative to the degree to which they have recourse to assets held outside the UAE. This is because they can litigate in those jurisdictions and achieve a greater recovery. I think it was a good step for the Dubai to establish the DIFC Tribunal for claims against Dubai World but it is untried and it is probably still likely to confer a, let’s call it “home field advantage” in litigation with creditors. Dubai’s power with the creditors varies to the degree that the creditor is interested in maintaining a relationship with Dubai or perceives that strong arming Dubai will damage its relationship with Abu Dhabi. The bank lenders at the holding company level probably have the most to gain in international litigation but the most to lose in terms of damage to their relationships if they do that. The hedge funds who have bought Nakheel sukuks don’t care about their relationship with Dubai but have recourse only to non-existent Arabian/Persian Gulf islands and therefore, in my opinion, are screwed.
More people can buy the bonds than can take possession of the collateral.
This is an issue that I have not really seen raised as yet but I think that in the event of a liquidation of any of the real estate subsidiaries a disconnection between the ability of someone to lend money against an asset they cannot possess may have a sever effect on real estate throughout the region. This is an important but subtle point that may best be addressed through an example. There are no restrictions on who can own the Nakheel Sukuks. Anyone can buy them, indeed a great many of them are held by western hedge funds at this stage of the game. The land which secures them however can only be legally owned by GCC nationals. This means that the supply of capital to finance real estate is vastly greater than the supply of capital which can actually take possession of that real estate in event of default. This may mean that the debt is overpriced relative to the assets that secure it. In the event that Nakheel is liquidated the prices that result at auction to GCC nationals will probably be vastly less than if they were held in an open auction at which anyone could purchase them. This has the potential to illustrate to other international creditors the disconnect between owning debt and having recourse to the securing asset. This may choke off international finance to local real estate projects and further depress prices.
It is overwhelmingly likely some, perhaps a great many, of the creditors will refuse the terms on offer and seek to litigate.
This is just my opinion but I think that the facts are generally the following: things at Nakheel are far worse than most of the creditors understand. What seems clear is that whatever Dubai offers most of the creditors are going to have to take very substantial losses. I think the Dubai Inc. marketing machine and the generally opaque nature of its financial disclosure has created an unrealistic sense among creditors as to how likely they are to be repaid. Add to this the fact that Dubai has significantly damaged its credibility over the past few months. The creditors may be tempted to believe that Dubai Inc. is just leading with an aggressive bid to establish a strong negotiating position. This may lead them to call what they consider to be Dubai’s bluff. The only way for the cards of either side to be shown is in a liquidation and that is where I think we are going at least in the case of Nakheel.