Economic recovery in Dubai is pushing both creditors and debtors to weigh new strategies in the $25 billion restructuring of state-owned Dubai World, one of the Middle East’s largest ever debt deals.
The conglomerate has begun talks to adjust a restructuring plan originally signed in 2011: it would make its first big repayment early, in exchange for more time before a second and much larger obligation needs to be repaid, two sources with knowledge of the matter said.
At the same time, some foreign banks are seeking to divest parts of their exposure to Dubai World as improved confidence in the emirate raises debt values to levels which make offloading favourable.
Lloyds, one of the banks on the committee which negotiated the original debt deal, attempted to sell off more than $450 million of its exposure at the end of June, three sources said.
Other lenders are also reviewing whether to change their exposures to Dubai World – most notably two banks which might potentially offload over $500 million of debt between them, according to investment house Exotix.
Dubai World and Lloyds declined to comment. The sources spoke on condition of anonymity because of the commercial sensitivity of the matter.
RESTRUCTURING A RESTRUCTURING
Under Dubai World’s original restructuring plan, it was scheduled to repay a $4.4 billion chunk of debt in May 2015 and an additional $10.3 billion in 2018.
The deal was supposed to allow time for the diverse conglomerate’s assets to recover in value, after they were hit by the global credit crisis and a property crash in Dubai. This would permit them to be sold to fund repayments to creditors.
Initially, many assets recovered only slowly and some, such as U.S.-based luxury retailer Barneys, saw their values drop. This inhibited the sale process.
However, some progress has been made in recent months and small repayments have been made to creditors, under a mechanism which distributes cash from asset sales once a certain threshold has been reached.
Dubai’s economic recovery has also helped, with other state-owned entities gaining the financial strength to take on assets from Dubai World companies, such as Investment Corp of Dubai’s acquisition of the landmark Atlantis hotel.
This led one of Dubai’s top executives, Mohammed al-Shaibani, to tell Reuters in March this year that Dubai World had the cash to make the May 2015 repayment.
However, he also said various options involving the 2018 payment would be discussed with lenders. Blackstone Group was named as an adviser to Dubai World in April.
Under plans being discussed between Dubai World, its advisers and senior lenders including HSBC and Emirates NBD, the 2018 maturity would be extended to 2022, in exchange for early repayment of the full amount due next May, the two sources said.
The discussions have not so far included the full creditor group, and have not touched on whether a new interest rate would be set on the extended 2022 maturity, or on whether a new timetable for asset sales would be put in place, one of the sources added.
Dubai World will be hoping to use the emirate’s renewed economic strength, boosted by a resurgent local real estate market and growth in core industries such as tourism, to convince creditor banks to grant it additional time. Goodwill accrued from the small repayments made to date may also help.
If Dubai World succeeds, it may ultimately be able to pay back more of its debt with retained earnings rather than the proceeds of asset sales, allowing it to keep some key businesses which it would otherwise have to divest.
Other Dubai firms have already used improved lender sentiment to get better terms on their borrowings – the latest is DP World, which tripled the size of a $1 billion loan and cut its cost by a third last month.
While these talks are underway, banks with big chunks of Dubai World debt are reassessing their stances. Lloyds attempted to secure a price above 80 cents on the dollar when it offered to sell over $450 million of exposure at end-June, but pulled the deal when it only got bids in the 70s, the sources said.
One of the reasons for the failure of the auction may have been uncertainty over whether the 2018 maturity will be extended. The British bank has around $535 million of Dubai World exposure in total, a July 21 note from Exotix said.
The sources didn’t know the motives for Lloyds’ interest in a sale but the lender, 24.9 per cent owned by the British government, is under pressure to focus on its domestic business.
“If I saw the debt reach a level which I had already provisioned against, I would sell out,” said one of the sources, at a bank which has exposure to Dubai World.
Exotix said that in addition to Lloyds, a British lender was rumoured to be eyeing a sale of $500 million of Dubai World debt and a European bank was aiming for a $50 million divestment.
Danny Reynolds, associate director at Exotix, said the uncertainty over the 2018 payment and failure of the Lloyds auction had blurred valuations of the Dubai World loans, but he would not expect bids in this second round of attempted sales to be as high as those presented to Lloyds.
If sales of Dubai World debt do go through, they could make the group’s effort to extend maturities beyond 2018 more difficult. Specialist distressed debt funds could come to own a large slab of Dubai World debt, instead of commercial banks which are eager to retain business relationships in Dubai and might therefore be more willing to compromise.
Another bank watching the situation carefully is Emirates NBD, the largest single creditor to Dubai World. The bank, Dubai’s largest, has said it could reclassify its exposure to the group as a performing loan in 2014, allowing it to reverse the provision held against it – around Dhs409 million ($111 million) of an outstanding Dhs9.14 billion.
“We will review our Dubai World exposure in the coming time in line with the existing restructuring plan and the ongoing discussions that are reported to be taking place,” Shayne Nelson, chief executive of ENBD, told reporters on July 24.