Sunday, April 18, 2010
Dubai to Creditors in "interest rate stand off:" DODGE THIS!
So I have to admit that I am a little disappointed. I expected there to be a lot more suspense with regard to the Dubai World restructuring talks. Sure, there is a dispute regarding the interest rate that Dubai World will pay on the extended maturity loans that the banks will get. It seems that Dubai wanted to pay 1% fixed, a better rate than the US government gets for a similar term and the banks want them to pay 3% over LIBOR something more in line with what the actual risk of default is. To be fair this has the makings of some interesting drama. 1% flat vs. 3% over LIBOR is a pretty wide Gulf. At stake for the banks is a pretty big write down. You have to remember that when the banks put these loans on their books they include the future interest they are going to receive and therefore if they are going to get less interest that have to book a loss. At the Dubai rates the losses are over between 5% and 25% of the face value of the loans depending on the costs of funds of the banks. The FT describes the negotiations over rates as a “stand-off.”
So what exactly is the “stand-off?” The FT article goes on to say that the banks are not concerned about principal repayment and are not negotiating the fundamentals. Personally I think those issues merit far more attention. The fact is that in this transaction Dubai has completely drained the DFSF, the restructuring is completely a Dubai only affair. $1.5 billion of the remaining funds go to pay interest on the Dubai World debt the other $8 billion goes to Nakheel where the Sukuk holders are to be PAID OFF IN FULL. That’s right, the creditors of the subsidiary are getting 100% of their money back while the creditors of the parent are taking a 5%-25% hit to their P&Ls.
This is a huge victory for Dubai. The Dubai World creditors are going to sit back and watch while $8 billion is pumped into Nakheel to rescue the Emirati trade creditors and real estate investors. Thier principal repayments will threfore hinge on whether Nakheel can be brought back from the dead. The seem blisslfully unaware of the fact that Dubai real estate is off 30%, and the last thing Dubai needs is for Nakheel to come back to life and create even more supply. If I were a member of the creditor committee there would be a “stand-off” all right but it would sure as hell involve the fundamentals. There is no way I would allow the Sukuk holders who in event of default get worthless desert to be paid off in full when in event of default I get Dubai Ports World and whatever assets in Istithmar are above water as well as the JAFZA. Yep, that would be my stand off.
When someone says the word “stand-off” to me I generally think of Clint Eastwood on the main street of some town in the American West facing off against some other gunfighter or the final scene in a Quentin Tarantino film where everyone is pointing a gun at everyone else and there’s some real tension. In this case I don’t think it’s like that. I think it’s more like the joke where an aging Winston Churchill asks a young socialite whether she’ll sleep with him for five million pounds. The socialite, after some reluctance flirtatiously agrees. Then Churchill asks her whether she’ll sleep with him for five pounds. At this the socialite declares “Mr. Churchill, what kind of woman do you think I am?” To which Mr. Churchill responds: “Madam, we’ve established that, now there is simply a matter of price.”