Dubai World creditors face painful choices. The conglomerate is close to a proposal for restructuring $26 billion of debt. But if lenders resist the deal, the process moves into uncertain territory.
The plan is expected to cover debts, mainly unsecured, of around $20 billion owed to 97 banks. It will also encompass $4 billion due indirectly to Abu Dhabi, after the emirate agreed to refinance a Dubai World bond in December. Another $2 billion is split between two sets of bondholders at property subsidiary Nakheel.
Creditors still hope Dubai World will receive a full bailout from Abu Dhabi, which has also pledged a further $6 billion of financial support. But Abu Dhabi has indicated that its assistance was designed to fund working capital while Dubai World found a home-grown solution to its woes. Absent a full bailout, international creditors want the Dubai government to be treated as a subordinated creditor, according to a person familiar with the situation. They also want a choice of getting back the full face value of their loans over time, or cash up-front with a haircut.
Without a fresh injection of funds, it is hard to see how Dubai World could provide a rapid redemption option. True, creditors could demand a fire sale of assets such as ports operator DP World or investment subsidiary Istithmar. But Dubai World's response would probably be to file for local bankruptcy protection.
A big bankruptcy remains an untested process in Dubai. The newly implemented framework appears to allow the court to ram through a restructuring with the approval of two-thirds of just one debtholder class. By contrast, an out-of-court agreement requires approval of all banks and 75 percent of bondholders.
It's unclear how many voting classes exist, but a court process could in theory disadvantage international creditors. The government is Dubai World's single largest creditor, and Moody's estimates local lenders are owed $15 billion. They may be minded to support whatever Dubai World proposes at the outset. Of course, Dubai will not want another big row. But international creditors will have to weigh very carefully what they are offered before picking a fight.