Dubai: The Dubai World financial restructuring plan will be presented at the end of next month to the 66 banks that have not yet approved the proposal, a Dubai World spokesperson told Gulf News. A final resolution could take place "months from now", the spokesperson said.
The seven big banks that are part of the Coordinating Committee, or CoCom, granted in principle approval to the plan yesterday. These seven lenders hold about 60 per cent of Dubai World's $23.5 billion (Dh86.4 billion) financial liability and have the other banks' mandate to coordinate with the conglomerate.
Once the deal goes through, the banks will finally be able to write down provisions related to the Dubai World debt-restructuring proposal. Dubai World said "headline economic terms" have been agreed in principle with its financial creditors on the restructuring of liabilities.
Refined proposal
Since Dubai World presented its restructuring proposal on March 24, the company has refined the proposal to "modestly enhance" one component of the repayment package, it said in a statement.
Aidan Birkett, Chief Restructuring Officer of Dubai World, said: "This is an important milestone and reflects our efforts to achieve the best possible solution for all stakeholders. The proposal puts the company on a sound financial footing and reflects the continued support of the Government of Dubai and its lenders."
The deal, which requires no new financial support from the Dubai Government, awaits approval from banks outside the CoCom, Dubai World said.
Analysts have welcomed the agreement saying it clears the way for credit flow to resume.
After restructuring, Dubai World's financial indebtedness will be approximately $14.4 billion in two maturities — Tranche A of $4.4 billion payable in five years and Tranche B of $10 billion in eight years, the company said.
Each lender will receive a rateable portion of each tranche and will be able to select options for its Tranche B participations.
Creditors can opt for a higher payment in kind (PIK) coupon, a higher government shortfall guarantee, or get a higher cash and payment in cash (PIK) coupon.
The first tranche offers a five-year maturity and a 1 per cent cash interest but no PIK or shortfall guarantee. The second tranche offers 1 per cent interest, and varying PIK rates depending on the options lenders choose. The PIK rates range from 1.5 to 2.5 per cent in certain years of the maturity. Banks will be entitled to elect different options for which they are eligible for different parts of their debt, also depending on the currency in which they have made their loans to Dubai World.
The final proposal has not changed in its fundamentals from the terms announced on March 25, except for an increase in the PIK.
"The interest rate is still lower than lending cost. Banks will have to take write-downs, but to a lesser extent," said Deepak Tolani, vice-president at Al Mal Capital.
He said the ‘haircut' was initially thought to be 15 per cent, but has now dropped to 10-15 per cent. "But in the third quarter and fourth quarter, we will see some write-downs," Tolani said.
Creditors will be also be repaid at different rates depending on their lending in dollar or dirhams. "Lenders who extended facilities in dirhams, which include a number of international banks and who elect this option, forgo a shortfall guarantee but receive higher cash and PIK coupon," Dubai World said in the statement.
"The bill that's come out compared to rumours…is positive. There's clearly a demarcation between lenders in dollar versus dirham, they are recognising the different lenders and different issue…. So they can get a little bit of extra interest," Tolani said.
"The three options are in the hope that they please everybody. Its over and beyond what we were expecting," Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments said, adding that now investors can focus on micro rather than macro issues which were overshadowing debt markets.
Better terms
Rami Sidani, head of investment at Schroders Middle East said the terms of the final proposal were better than expected, due to the 1.5 to 2.5 per cent payment-in-kind option available for new load maturing in eight years.
"We expect domestic banks to take haircut of 20 per cent due to extension of maturity. However, we will be waiting for central bank to provide flexibility to deal with prolonged provisioning over 2 to 3-year period. We have yet to see the guidance from them," said Sidani.
He said that banks would not need a capital injection. "There is no worry for banks and they will be able to manage the haircut," he said. "We can rule out any bankruptcy."
Mohieddine Kronfol, managing director of debt markets at Algebra Capital said: "A large proportion of debt has been dealt with and banks seem to be satisfied." He said that the agreement, however, would not reflect in Dubai World's position to raise more capital from debt markets at the moment. "They need to tackle a few more issues to see lending return to pre-crisis level."
Yield
Credit Default Swaps (CDS) rate — which represents the cost of insuring against default the debt issued by the Dubai Government — declined marginally after yesterday's agreement was announced.
Dubai CDS fell 7 basis points to 463, according to data provided by CMA DataVision in London. Abu Dhabi's CDS dropped 2 basis points to 110.5 and Bahrain's narrowed 8 basis points to 168.5.
Dubai World subsidiary Nakheel's only outstanding bond, a January 2011 dollar issue, jumped to a new record. The bond rallied 1 point in price with yields down 1.5 per cent to around 6.2 per cent. Earlier this month, Nakheel too announced a full repayment of its liabilities to creditors. It also made a full repayment of a $980 million maturing bond.
Other bonds issued by Dubai entities also saw their values strengthen. The Dubai finance ministry's 2014 Islamic bond rose 0.88 points to a mid-point of 96.5, the highest since May 5. The yield fell 24 bps to 7.47 per cent. The Islamic bond issued by Dubai World subsidiary DP World rallied 0.36 points to around 87, also the highest since early May 5. The yield dipped 7.5 basis points to 8.9 per cent.
