Tuesday, July 27, 2010
Here's the plan: we liquidate Dubai World in slow motion and hand out the money starting to my left, if the creditors agree they can sit between us...
Last week there were some seemingly minor developments in the Dubai World saga. These were the Nakheel restructuring plan and the presentation of the Dubai World restructuring plan to the general lending community outside the Lenders Committee which had blessed the proposal back in May. On the surface of it this presentation carries with it no new news, the proposal is more or less identical to what the big lenders agreed.
I’ve written about this before at length, but to summarize, the lenders will be asked to roll their loans out into tranches of five and eight years. There will be no haircut on principal but the interest rates will be cut to 1% on the 5 year tranche and between 1-3.5% on the eight year tranche. Apparently the 8 year tranche will have several choices for the lenders on repayment type and the degree to which there is a “shortfall guarantee.” Presumably the more risk the lender takes the higher the rate. It seems kind of a Hobson’s Choice to me because even 3.5% is substantially below a market price for that risk and the word is that there is some question as to whether the guarantees would be enforceable in UK courts.
So what is different about this announcement than the one that was made in May? Well, several things. One is that the lenders are not in a position to negotiate the terms, it is a take it or leave it deal. The big banks had an opportunity to challenge Dubai on the nature and structure of the deal back in May but they were more concerned about not taking too big an immediate loss. They successfully blocked Dubai’s opening gambit of a partial write down of principal but conceded on the structure of the deal and on concessionary interest rates. By doing this they basically enabled the government of Dubai to drain the DFSF, channel the vast majority of the funds to Nakheel, and through Nakheel to the Sukuk holders and the local contractors which had trade claims against Nakheel. The Nakheel creditors, who are also mostly local are getting a much better deal than the creditors of the parent company. Well that’s what happens when you put immediate loss avoidance ahead of your long term strategic interests but considering that this decision was made by western banks it should come as no surprise.
Interestingly the new sources of repayment seem to acknowledge that Nakheel is doomed and the DFSF transfer was mostly to rescue local firms rather than actually revitalize Nakheel. Back in May there was talk about how the cash injection into Nakheel would enable it to finish it’s projects and contribute to the repayment of the Dubai World parent company creditors. In the new proposal there is a lot more discussion of asset sales, it seems that Infinity and Istithmar will be liquidated entirely and that some of the holders of the Dubai 10 year tranche will be repaid with the sale of “strategic” assets which can only mean Dubai Ports World. There is also some talk of the creditors in the 10 year tranche being paid off “in kind” whether this means shares of DPW or non-existent crescent shaped islands I do not know. My guess is most banks other than perhaps NBD-Emirates would avoid that option.
It also sounds like the tone was a bit more aggressive. The package was delivered as an ultimatum: “Take this or take your chances with a liquidation.” To add insult to injury it has been insinuated that the DFSF may take precedence to the original creditors in the event of liquidation. Additionally the procedure would be executed in the DIFC under a special tribunal established for the purpose rather than the original jurisdiction of the contracts. This is a point made in an interesting interview of the former head of the DFSA. Before the Damas fiasco I would have said they were better off in front of a DIFC panel but given the impunity with which the Abdullah Brothers have gotten to skip out on their payment plan without having to either actually pay their fine or even disclose that plan I think the creditors are quite right to be fearful of what would happen in the event of default.
The question on everyone’s lips seems to be whether the creditors will accept the proposal or not. Personally I think it is a near certainty that they will take it because at this stage they have no other option. Nakheel had already taken its’ cash infusion and divided it among the largely Emirati Sukuk holders and the trade creditors there’s no more help from Abu Dhabi on the way. While it’s questionable that DFSF might be in front of the creditors it’s a good thing that Dubai is swapping its own debt for equity and getting behind the creditors. So what in essence is happening is the DFSF is jumping to the front of the creditor queue and Dubai is getting in back with the banks in the middle. My guess is that this was forced on Dubai by Abu Dhabi: pay us off first, then the foreigners so the UAE saves face, then whatever’s left you can have.
In strategic terms the creditors have no interest in forcing a liquidation because, if you assume that Nakheel will not recover within 8 years, most of the repayments are going to be funded by the liquidation of the Istithmar, Infinity and the eventual sale of DPW and other “strategic” assets. You can think of the restructuring as a slow motion liquidation. A slow motion liquidation is probably much better than a liquidation adjudicated by an authority which is ultimately under the control of the wounded former equity holder. As an added bonus, the slow motion liquidation will be masterminded by Abu Dhabi which has every incentive that it come off because it, is in front of the creditor queue. The bank creditors probably prefer this because Abu Dhabi has more power over Dubai than they do.
The interesting question to me is just how much are the assets that are for sale going to bring in. What will Dubai be left as the equity holder of? My guess is they would be happy if they could pay everyone off with all the international assets and keep JAFZA and Nakheel. It’s still an open question though. This is something that won’t be known for many years. I think the banks mostly did not push harder because most of the people making the decisions know they will be elsewhere when the falcon comes come to roost.