Dubai World: Times are looking a lot brighter at Dubai World. The troubled holding firm has revised its plan, first outlined in March, to restructure its $23.5 billion debt. Dubai is not putting in any more cash, but is giving creditors more choice. Lenders representing 60 per cent of the bank debt have already indicated their support. That puts Dubai close to the threshold it needs to force through the deal.
Under the original plan, Dubai offered to convert its $8.9 billion of loans into equity, and to pay back $14.4 billion of bank debt in five to eight years. However, all lenders were all offered the same rates and government guarantee, according to a person familiar with the situation. This one-size-fits-all approach did not go down well with the diverse group of 73 banks.
The new plan deals with this problem by dividing the bank debt into two parts. The first tranche of $4.4 billion will be repaid over five years with a 1 per cent annual cash interest rate. The second $10-billion tranche is stretched over eight years and also pays 1 per cent annual cash interest. However, it comes with a choice of payment-in-kind interest varying between 1.5 per cent and 2.5 per cent a year, combined with a Dubai guarantee to repay up to $4 billion in the event of a shortfall.
This structure effectively allows Dubai World's banks to choose between less cash and more security, or a higher payout with less security. Asian lenders that are under pressure to secure a bigger guarantee may favour the former, while international banks with long-term strategic interests in the Gulf might prefer the latter.
Either option involves the banks taking a haircut, however. Though Dubai World is repaying the bank debt in full, the revised interest rates are significantly lower than original terms at which the loans were made - though these were never disclosed.
Dubai’s government is keen to secure a consensual deal, which requires 100 per cent approval of the lending group. But it only needs the support of lenders representing two-thirds of the debt to push the restructuring through a tribunal it put in place in December. The deal could have been a lot worse. If lenders don’t approve it, Dubai will be right to force it through.