The world isn’t sinking

Investors breathe a sigh of relief as Dubai World announces debt restructure

After four months of anxious waiting, the Government of Dubai, along with government-owned conglomerate Dubai World and real estate subsidiary Nakheel, released official statements on March 25 regarding the restructuring of billions of dollars in debt and the reorganization of both companies.

 

The emirate stated that it intends to support the debt restructuring plans of Dubai World and Nakheel “with significant financial resources, including…up to $9.5 billion in new funding,” according to the statement by Sheikh Ahmed bin Saeed al-Maktoum, chairman of the Dubai Supreme Fiscal Committee. Acting on behalf of the government, the Dubai Financial Support Fund (DFSF) will allocate $1.5 billion to Dubai World and $8 billion to Nakheel, of which $5.7 billion stems from unused Abu Dhabi loan proceeds. The remainder will come from internal governmental resources.

Restructuring and reactions

Dubai World’s $23.5 billion of outstanding debt is broken down between $14.2 billion in external debt (including United Arab Emirate banks) and $9.3 billion owed to the Government of Dubai through the DFSF. Given the sheer size of the tab, there were many turmoil-filled scenarios that had circulated through the Gulf financial world before the debt restructuring announcements — which have been greeted with a general sigh of relief.

Three key takeaways from these announcements were: First, the DFSF capital injection of $1.5 billion will be used to fund Dubai World’s working capital and interest payments on its restructured debt. Second, the Dubai government will equitize $8.9 billion out of its $9.3 billion debt outstanding, and such restructuring – meaning the capital injection plus the equitization “will allow Dubai World to focus on its core holdings and to manage and realize full value from its assets,” stated the Government of Dubai. Finally, the 97 non-DFSF creditors — of whom Emrati and United Kingdom banks own the lions share of the debt — will see their $14.2 billion claim fully restructured with a haircut on the principle, through the issuance of new debt into two tranches of five and eight-year maturities.

The announcements were well received by the markets, bringing down the cost of insuring Dubai’s debt. This is most clearly exemplified by Dubai’s five-year credit default swap spread dropping 14 percent, sliding from 420 basis points to 360 basis points. To crunch a few numbers, with the current 6.5 percent discount rate — as opposed to February’s 10 percent — and a 50 percent principal repayment in five years and the other half in eight years, the net present value is 67 cents on the dollar; much less of a hit than creditors had initially feared.

Nakheel restructuring and the real estate sector

The DFSF capital injection of $8 billion will be used to fund Nakheel’s operations and to terminate its current outstanding debt. Moreover, the government will also “recapitalize Nakheel through the equitization of the Government’s $1.2 billion claim.”

Even if the terms of the announced deals vary according to the type of creditor, all Nakheel debt holders will receive full repayment — when, however, is another question, as most maturities are as yet unclear. The schedule of Nakheel sukuk Islamic bond holders is set though, and should be fully repaid on their 2010 and 2011 maturity dates.

The bottom line
$9.5 billion in fresh funds to be injected by the Dubai government
$1.5 billion into Dubai World
$8.0 billion into Nakheel
Of which:
$5.7 billion is from unused Abu Dhabi loan proceeds
$3.8 billion is from internal Dubai government resources Dubai World’s $23.5 billion debt breakdown:
$9.3 billion owed to the Government of Dubai (of which $8.9 billion will be equitized)
$14.2 billion owed to external creditors, who should receive full repayment via new debt, in tranches of five and eight year maturities

 

Since Nakheel developments amount to a substantial amount of the pending projects in Dubai, the proposal “will have a significant direct impact on the construction and real estate sectors and the wider economy,” stated Sheikh Ahmad.

Challenges remain

The announcements bring some much-needed positive sentiments back to the market. However, “the restructuring process is expected to take several months to implement,” highlighted Sheikh Ahmed, and the high capital injection and governmental equity share might decrease the potential support for other struggling government-related entities. Furthermore, the financial support increases UAE government exposure to Dubai World: a situation not as welcomed by creditors as a government guarantee would have been. Finally, even if Nakheel’s restructuring proposal helps investors regain confidence in the real estate sector, the oversupply of product built and near completion remains.

*

Top