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Restructuring: Dubai shows the way forward

Dubai World’s debt restructuring shows that orderly, voluntary agreements are the best solution to a crisis.

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.

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