Sunday, April 18, 2010
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.”
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.