Monday, April 5, 2010

OK Creditors, this is Nakheel and once we bring him back from the dead he'll pay you off in full. Nurse,Set the charger to $8 billion: CLEAR!



My apologies, friend readers, for my extended absence. I have been engaged in an alien activity called “working.” But that’s all done with now and I can turn my attention back to the goings on in Dubai.

So it seems that the equity and credit markets have decided that the Dubai World proposal was “better than expected” and have roared their approval by taking prices higher, particularly of the Nakheel Sukuk. The prime causes for celebration are the fact that Dubai World beat its own deadline, making its announcement on the 25th, and the simple fact that there was an announcement and a more or less detailed outline plus a conference call was vastly more transparency than has come out of Dubai regarding this since the whole crisis began back in November. So gratifying was the transparency that the Citibank report on the subject was entitled “Dubai Restoring Confidence Sooner than Expected.” For people voting with their dollars in the credit and equity markets this seems to be the case. The question I have to ask is, is that confidence justified?

The terms of the deal are interesting in themselves. As I mentioned in my earlier note, this is a Dubai only show. Dubai basically converts all the money that it has previously lent to both Dubai World and Nakheel into equity, putting the other creditors ahead of itself. A noble gesture, this. It then drains the DFSF, putting $8 billion into Nakheel and $1.5 billion into Dubai World. The Dubai World creditors will be invited to roll their loans out into new ones with maturities of 5 and eight years. The repayment of the principal of these loans will be from operating earnings and asset sales.

The Nakheel proposal is the more complex and more interesting one because it has a lot more moving parts. So $8 billion goes in and immediately $1.5 billion goes to continue work on existing developments with the hope that this will unlock additional payments from off plan buyers and that buyers of developments which are “long term” (ie they will never be built) will be willing to swap their claims into projects that may actually exist. Trade creditors under 500k AED are paid off in full and those over 500k AED will get 40% cash and 60% in a tradable security. Sukuk holders will be paid off on time and in full. Bank creditors will be asked to roll their debts but with market interest rates. DFSF will equitize its loans.

Despite the intricate plan and the cash behind it there remain a few questions. Dubai has been obtuse in discussions of whether any further support will be forthcoming or whether any guarantees are being extended. Many details about the tradable security are left to the imaginations of the creditors and the bankers. Also no mention is made of what interest rate, if any, the extended Dubai World debts will pay. And of course on top of these questions rests the $23 billion question of whether the creditors will accept this deal.

The question I would be asking if I were a Dubai World creditor would not be about the interest rate or about the tradable security. I would be asking why they were going about it this way? It would seem to me that if the tools in the tool box that Dubai could deploy were debt forgiveness through equiziation and a willingness to completely drain the DFSF then this seems a pretty odd way to deploy the capital. I’d think they would be better off putting Nakheel into liquidation in order to rescue the creditors at the parent company level would have been optimal. They could have simply defaulted on the Nakheel sukuks and then handed the worthless collateral over to the bondholders. They could have put whatever projects have been completed but not pledged and the remainder of the land bank up for auction and then paid out the proceeds to the trade creditors and the bank lenders and if anything was left over for them they could have passed it up to the parent. If they had done this then they would have been able to devote an additional $8 billion to Dubai World or rather would have had to conduct $8 billion fewer asset liquidations.

Instead what the restructuring plan represents is a “Hail Mary” pass to try to resuscitate Nakheel. The theory seems to be that if they pump the lions’ share of the remaining DFSF funds into Nakheel they can get some of the Dubai Waterfront projects off the ground. The idea must be that then it can be made into a going concern that will enable them to pay off the sukuks, the Nakheel Bank creditors and pass funds up to the parent and pay off the holders of the new five and eight year bonds with the mystery interest rate. There’s probably more to it than that. Dubai has become an Islamic financial center for it to become the site of the largest Islamic default in history is probably not a good idea. Also there seems to be a disproportionate amount of attention being paid to the well being of the people who own off plan real estate in Waterfront, what are the chances that these are largely Emiratis? Pretty good I would say. How about the trade creditors? Probably the same, it’s probably also the case that Arabtec’s new owners, the same guys who filled up the DFSF in the first place, are probably also big fans of the consideration being shown to the Nakheel trade creditors.

From this perspective I wonder how the creditors of Dubai World at the parent company level feel. Under different discount and interest scenarios Merrill Lynch estimates that the Dubai World creditors will take a $0.32-$0.55 cent on the dollar loss under this restructuring. If you were such a creditor how would you feel about Dubai pouring $8 billion into Nakheel, an entity which has an absolutely atrocious operating history, has been involved in all manner of shady dealings most of which will never come to light and which has already swallowed billions and billions of dollars. Fine, they’ve replaced the chairman of Nakheel though he remains the Chairman of Dubai World but they’ve replaced him with another Emirati whose chief qualification is almost certainly his willingness to toe the party line as well.

Then you have to ask yourself what is the business proposition into which this $8 billion is being poured? The idea behind it is that a profitable return can be generated on another new massive real estate project in Dubai. I find this almost impossible to believe, it’s as if the people in charge of this thing have not read a Dubai newspaper in the past 18 months. Dubai real estate has fallen off a cliff. Most property holders in Dubai are just trying to stay out of jail for not bouncing checks and now the DFSF is interested in pouring $8 billion into Nakheel in order to add another Hong Kong to an already collapsing real estate market? And if you are a Nakheel 2011 sukuk holder or a Dubai World holding company creditor like it or not this is the bet you have on, because if it doesn’t work you don’t get paid. If you had a choice would you take that $8 billion and invest it in Dubai real estate or would you just pay yourself with it and call it a day?

I guess we’re going to find out what the creditors think. There may be more transparency but it’s just revealing a different drama.

12 comments:

the real nick said...

You ask why are they going about it this way?
In this region here honour and 'saving face' is everything; logic is secondary.

And no, I don't think the rulers read newspapers.

Al Mazaya said...

First of all I must say that your post is really creative and the way you have used the title tells the whole story. Answering your question I will say that I would definitely invest $8bn in Dubai as it still has a great potential to provide good ROI in future.

Anonymous said...

A good article but sometimes Ken you let yourself down with sweeping statements like 'Dubai real estate has fallen off a cliff. Most property holders in Dubai are just trying to stay out of jail'... that is simply not the case for everyone. We sold a property 2 months ago that we had bought 3.5 years ago, and sold with a healthy 35% profit. Decent return in any market. Many people in Dubai are hard working honest people who are living in their homes, paying off the mortgage, just like anywhere else. So dont assume every property holder is/was a speculator that got burnt. Look in the mirror at the mess the USA property market is still in.

Ken said...

@Al Mazaya, well you're in luck. It looks like it might not be too late to load the boat on off plan apartments in Dubai Waterfront or alternatively I'm pretty sure you'll be able to pick up the "tradable securities" at a discount.

@Anonymous Good point, I can get a little carried away. I do not intend to make the point that all Dubai is a wretched hive of scum and villany. I agree with you that there are a great many non-speculators in Dubai who have been carried along and are hardworking ordinary people. I congratulate you on your recent sale.

The point I am making, and I don't think it conflicts with yours is that the Dubai real estate market is under severe pressure and is likely to remain so for the forseeable future. Yes, you sold a property you bought 3.5 years ago for a 35% return but if you had sold it 18 months ago you may well have gotten twice that depending on where it is etc.

For Dubai to bet the fortunes of the Dubai World creditors on a revivial of the fortunes of Nakheel I think it really a long shot and not one I would be comfortable with as a creditor.

Anonymous said...

Seems to me the creditors of all stripes are still trying to strengthen their balance sheets and are more than happy to postpone the dread day when they must show their losses as actual.
The underlying business plan for ultimate repayment is clearly ridiculous - exactly how do you make the huge profits required building houses in an oversupplied market with a static/falling population, not to mention the consequent erosion of the value of the existing housing stock by the creation of yet more supply.
@Al Mazaya should give me his $8bn - I've got this great scheme to build igloos in Egypt....

Ken said...

The thing is if the banks have to roll their debt out to 5-8 years with below market interest rates then they have to take a mark to market hit today.

Anonymous said...

Point taken Ken that could have made double my money if I had sold earlier. But 35% over 3.5 years is still a lot better than friends who bought in Miami 3 years ago and are having to sell at 50% loss. The USA is still in a mess real estate wise in many areas.

Anonymous said...

guys just watch out...there is a very good chance that dubai will convince the creditors to roll over the debt 5 to 8 years...and then come up with another surprise and/or decree and NOT pump in any money...i would not be surprised...better to take a haircut and exit

Anonymous said...

better to take a haircut and exit

What if you are already clean shaven. Most creditors are sick of endless promises and no cash

http://goodbadandugly2.com/wp-content/uploads/2009/08/dilbert-300x277.jpg

Anonymous said...

good money on bad things...

@ anonymous - US market might still be reeling, but at least you wont have to go to jail if you dont pay your mortgage.....there is such a thing as foreclosure in the civilized world....

Q80 said...

Here you go. He tells you like it is…

http://tech.mit.edu/V130/N16/dubai.html

http://tech.mit.edu/V130/N17/dubai.html

http://tech.mit.edu/V130/N18/dubai.html

http://tech.mit.edu/V130/N19/dubai.html

Anonymous said...

Thanks Q80,
the BCG bit is interesting, who would have thought BCG would be ready to give shut up money but then if they can sell Dubai dreams despite knowing the reality.....

http://tech.mit.edu/V130/N18/dubai.html