Before Greece hogged the headlines, the big sovereign debt crisis story was Dubai. Six months ago one of the emirate’s leading investment companies, Dubai World, shocked the markets by announcing that it would seek to restructure $23.5 billion of debt. Last month, agreement on that restructuring was reached with a majority of Dubai World’s creditors.
The big news is that non-government creditors will receive 100% of their claims via new debt tranches. Dubai World will issue two new bonds, one a five-year note for $4.4 billion; the other an eight-year loan for $10 billion. In addition, the government will inject $1.5 billion into Dubai World and convert $8.9 billion of debt owed to it into equity, thus putting other creditors’ claims ahead of its own. This $9.4 billion of equity will be largely funded through money given by neighbouring Abu Dhabi.
Some creditors will pick holes in the offer. The interest payment on the five-year tranche will be only 1%, for example, far below the market rate for Dubai risk – the sovereign’s five-year CDS spread was trading at 465 basis points even after the announcement. The other tranche, meanwhile, has a series of complicated options depending on the currency of funding and lenders’ risk appetite.
One option, for example, is cash interest of 1% plus payment-in-kind notes carrying a coupon of 1.5%. These payments will be made through asset sales but in the event that these sales don’t materialize or raise less than expected this option carries a sizeable, though still partial, government guarantee of $4 billion on repayment of the debt.
Another option is cash interest of 1% plus PIK interest of 2% for the first five years, and 2.5% for the last three, although with a smaller guarantee of $1 billion on any shortfall.
The final option, for dirham creditors only, is cash interest of 1%, plus the difference in the cost of funding between the local and London interbank market up to a maximum of 1%, and PIK interest of 1.5%. This option carries no repayment guarantee.
To give Dubai’s leaders their due, however, the terms of the deal are much better than many people expected back in November when the fire was first lit. At that stage such was the amateurish way in which the crisis was being handled that some investors feared they would be left holding nothing but sand.
Since then the process has been managed in a much more organized way. Bonds issued by Dubai World’s property arm, Nakheel, the company at the centre of the storm, will be paid on time and in full, despite initial doubts. Nakheel has also announced that it has reached agreement with its trade creditors for about 50% of their claims.
In addition, the government appointed an experienced administrator to oversee the Dubai World restructuring. He and his team made a preliminary proposal in March outlining much of what was eventually confirmed last month.
There is still work to be done. The restructuring is not yet a fait accompli. The deal has gained the support of creditors accounting for 60% of Dubai World’s debt but that still leaves a lot of banks weighing up their options, although the chances are most will submit.
And aside from Dubai World, the government has to address the rest of the emirate’s huge debt pile, estimated at $109 billion overall, with the risk that other state conglomerates might also have to go through a restructuring.
Still, by proposing an orderly and voluntary agreement for Dubai World, the emirate has taken a big step forward in addressing its problems. It is a message Europe’s troubled leaders should take on board.
