What next after restructuring?

Dubai: Dubai World, the Dubai government-owned conglomerate, which shocked the global financial markets in last November through its surprise standstill announcement, is heading to the final stages of debt restructuring agreed with its creditors.

The company is "well positioned to close the restructuring in the coming weeks" after agreeing with about 99 per cent of creditors, Dubai World said in a statement last week.

The holding company's approval from creditors to change the terms on $24.9 billion (Dh91.58 billion) of debt is likely to boost confidence in the emirate and its banks, according to analysts.

"Investors now have a good precedent and insight as to the conduct of large-scale corporate restructuring in the UAE. We should see some increasing stability of [credit] pricing, which will then bring foreign investors back to Gulf companies," said Khalid Howladar, a Dubai-based senior analyst at Moody's Investors Service. In May this year the company presented an offer to the major lenders representing about 60 per cent of its bank loans. The remaining lenders accepted the restructuring terms last week.

According to the terms of agreement, the company will divide $14.4-billion debt into two tranches, maturing in five and eight years respectively, while the government will convert $8.9 billion aid to the company into equity. The first tranche of debt will be valued at $4.4 billion, while the second will be worth $10 billion.

Bankers close to the restructuring deal say all parties are working earnestly to resolve the issue quickly. Analysts said although the deal involves impairments ranging from 15 per cent to 20 per cent depending on various repayment options offered, under the given circumstances an early resolution to the dispute was in the interest of all.

Not unusual

"It is not unusual for companies to seek loan restructuring. Dubai World attracted so much attention because it was linked to Dubai which not so long ago was associated with abundance of liquidity and high profile international acquisitions," said a banker associated with negotiations.

Although Dubai World and Nakheel are nearing completion of the first phase of restructuring, analysts say going forward cashflow positions of many real estate ventures will be too tight to service their medium term debt obligations.

While Nakheel has been recapitalised through government funding of $9.2 billion to restructure its obligations, some of the other government-owned real estate entities are still working on refinancing options for their debts maturing in the medium term.

Analysts say there could be debt overhang for many corporate- and government-related entities. "Dubai's GREs borrowed short-term money during the boom years to finance long-term investments, leaving them exposed to considerable refinancing risk. International and domestic credit remains tight, raising the prospect of more debt restructurings," said Farouk Soussa, an economist with Citigroup.

Dubai Holding Commercial Operations Group (DHCOG), the real estate and hospitality arm of Dubai Holding which reported a $23.5 billion net loss last year, is in the process of rolling over some of its existing debts. The company and its parent together have reported $12 billion debt obligations. The group insists that it does not require a debt restructuring. "As a result of the measures we took in 2009, DHCOG is well placed to meet its financial obligations in 2010. There is no need to restructure outstanding debt as discussions are taking place with banks to roll over our existing facilities at commercial terms," said Ahmad Bin Byat, Chief Executive of Dubai Holding in a filing to Nasdaq Dubai on June 1.

DHCOG's total assets were down to Dh124.5 billion last year compared to Dh171.4 billion in 2008. Analysts said the impairment was pretty huge resulting in an almost 20 per cent decline in the group's asset value and the outlook remains tough.