So the word is out about the Dubai World plan. The markets seem to love it.
So I have read the press releases and someone was nice enough to send me a transcript of the conference call. Naturally I'll have to write more extensively a bit later but my initial thoughts are the following:
1.) As I would have imagined much more support is being given to Nakheel than to Dubai World both because it needs more and also because it's creditors are more likely to be hostile.
2.) The support of Abu Dhabi in this is conspicuous for its absence. Dubai is basically draining to zero the DFSF and throwing in additional money from the Emirate of Dubai and converting what debt is owed to Dubai to equity putting itself behind other creditors. It is a Dubai only show.
3.) Despite the cash injection Nakheel is explicitly not granted any government guarantees. During the conference call the spokesperson declined to comment on any government guarantees of Dubai World itself on account of a "confidentiality agreement." I'm not sure what that means. How can a government guarantee instill confidence if it is protected by a non-disclosure clause. Seems kind of self defeating.
4.) The Nakheel restructuring plan is quite complex. $9.5 billion goes in from Dubai and the DFSF to "fund operations and liabilities." Fund operations? It seems that they are very concerned about a group of creditors which I have not so far considered on this blog: the people who bought real estate off plan and whose projects have stalled. It seems they are going to put the funds toward continuing construction and will offer swaps to off plan installement buyers in the developments which can be completed. They are also going to pay off trade creditors for under $500,000 in full and creditors over that amount will get 40% in cash and 60% in a "tradable security" so that they recieve 100% of their credit back. Anyone want to bet with me that the "tradable security" will trade at a substantial discount to face almost immiediately?
5.) I'm not sure what all this means for the Nakheel Sukuk holders. They seem to me to continue to bear a substantial amount of risk to Nakheel, Nakheel's execution capaility and through that to Dubai real estate in general. As I mentioned in my last post about this the trouble for Nakheel is that it can't raise new capital to continue its operations. So what Dubai is doing is going all in, not to secure the sukuk holders, but to continue operations. To do so it is using the money to continue construction, but is only paying out existing trade creditors 40% plus some "tradable securities."
Looking at the balance sheet of Nakheel as of June 30 2009, it seems that the accounts payable represent 28 billion AED, 40% of which is 11.2 billion AED or $3 billion. So now there is $6 billion left to fund operations and pay liabilities. Presumably the reason they want to continue operations is so that they can actually recieve some of the 17 billion AED they are owed in off plan installments but I wonder how much of the remaining $6 billion will be required to do that. The press release says a "substantial" amount will go toward construction.
If I were a sukuk holder I would sell on this pop.
6.) Interestingly I'm not sure the sukuk holders will get a chance to vote on the proposal because in the view of Dubai World they are unaffected assuming all other stakeholders agree to their restructuings. There are no changes to the terms of the sukuks being made. This is almost certainly because the sukuk holders are likely to be the mst recalcitraint group.
7.) The Nakheel proposal is very complex and requires a lot of people to agree to things which seem a little far fetched. Trade creditors have to take an opaque haircut determined by the degree to which their "tradable securities" trade at a discount. The bank creditors all need to agree to extend maturities. Owners of non-existent apartments on non-existent islands have to agree to take villas that are actually being constructed in a different location. There are a lot of moving parts and I think this announcement is a major step forward. However, I don't think this story is over.