Investment firm Dubai Group’s assets are worth just a fifth of its $10 billion of debt, sources involved in its restructuring said, signalling creditors signing up to a debt deal may face big losses without a major improvement in values.
A unit of Dubai Holding, the investment arm of Dubai’s ruler Sheikh Mohammed bin Rashid al-Maktoum, Dubai Group has a portfolio of mainly financial services assets bought during the boom years of the mid-2000s, but which have plunged in value since the 2008 global financial crisis.
After missing interest payments on two loan facilities in the latter part of 2010, Dubai Group and its lenders have been locked in what has been described by those involved as the most complex debt restructuring of a Dubai state-linked entity.
Dubai Group’s assets are currently valued at around $1.5-2 billion, below the $6 billion of debt owed to lenders, three of the sources said, without disclosing where they obtained the information. The other $4 billion of debt is intercompany loans that are subordinate to the bank debt.
One of the sources said the current valuation was lower than an assessment carried out by accountants KPMG more than two years ago, though he declined to give details.
A Dubai Group spokesman declined to comment.
Under a restructuring proposal agreed by some secured creditors and currently being considered by unsecured lenders, Dubai Group wants to extend its obligations by between 3.5 and 12 years to allow asset values to recover before sales happen.
Documentation was sent out to unsecured creditors, including Emirates NBD and Commercial Bank of Qatar (CBQ), on May 8. However, a June 6 deadline for creditors to secure a small bonus from the company by signing a deal has been extended until June 20, a fourth banking source said.
Last month, Dubai Group said it expected a deal to be signed in weeks and a source close to the firm said the aim was still to have everyone on board by the end of June.
Giving Dubai Group time would appear to be the best option for creditors. Liquidating it would be difficult due to the lack of a tested local bankruptcy law, while mass asset sales, even if possible, wouldn’t yield enough cash to meet claims.
“Creditors are aware of the financial position of the group and have extensively studied the restructuring terms,” the source close to the firm said, adding it had accumulated cash from divestments to service the debt for the coming years.
Sales made in recent months include landmark New York hotel Essex House and stakes in Oman National Investment Corp and a Turkish insurance business.
Dubai Group will initially need around $80 million a year, three sources working on the restructuring said, with $70 million for interest payments and the rest for general costs.
But securing the cash to do more – to repay the original debt – will take time and a significant growth in asset values.
“The group will have to grow its assets by at least 25 per cent (a year) over the next five years to be able to pay what’s due,” a second source close to the company said.
For the banks involved in the restructuring, some have moved to cover themselves against difficulty. Emirates NBD has made provisions covering 54.6 per cent of its $1.25 billion exposure.
Delayed repayments at lower interest rates would effectively result in an accounting haircut – around 30 per cent for a 12-year extension at a one per cent interest rate, as proposed to unsecured creditors, one Gulf-based banker said.
Repayment concerns saw five lenders strike a separate deal in January to exit the restructuring, taking just 18.5 cents in the dollar for immediate repayment.
Dubai Group’s ability to pay back lenders is handicapped by the fact that its value is concentrated in a small group of main assets, some already pledged against specific debts.
Its stake in Oman’s Bank Muscat, for example, was worth 171.5 million rials ($445.5 million) at Sunday’s closing price and is secured against debt held by France’s Natixis. Dubai Group paid $619 million for the stake in 2007.
Shares in Malaysia’s Bank Islam are pledged against a $330 million loan facility. Bank Islam CEO Johan Abdullah told local media last month Dubai Group’s stake could shortly be sold to BIMB Holdings. No valuation was given.
Events outside of Dubai Group’s control could also undermine some asset values. Its stake in Global Investment House is being diluted by the Kuwaiti firm’s debt-for-equity swap, and its holding in Cyprus Popular Bank was wiped out by its nationalisation under the island’s bailout plan.
Dubai Group rejected a $1 billion offer for the Cypriot bank stake in 2009, the second source close to the firm said.
Lenders will have more oversight of the company’s running, including asset sales, once the restructuring is complete via a recently-appointed liaison committee, which will consist of CBQ, Emirates NBD, Natixis and Mashreq, two sources said.
The additional time granted by the restructuring might allow a significant recovery valuations – Dubai Group has a small stake in Abu Dhabi’s First Gulf Bank, whose share price has risen 30.6 per cent in the year-to-Sunday.
However, some bankers believe many of the groups assets will be hard to sell and may never recoup any real value.
“Many are minority stakes where you have no influence,” said one regional banker, adding most would raise no more than $20-30 million.