Dubai World's restructuring plan

Dubai World's restructuring plan

Finding the ripcord

Dubai reveals a debt-restructuring plan, putting $9.5 billion into a troubled state conglomerate

EARLIER this year, Nasser al-Neyadi from the United Arab Emirates (UAE) leapt off Dubai’s newly opened Burj Khalifa, the tallest building in the world. He descended 672 metres (2,205 feet) in less than a minute, his fall broken by a parachute which opened ten seconds into the jump.

From the heady heights it reached in 2008, Dubai, one of seven members of the UAE, has fallen almost as far and as fast. Its hopes for a soft landing have always rested with its wealthy neighbour, Abu Dhabi, which sits on over 90% of the UAE’s oil reserves. But for a few horrible weeks at the end of last year, Dubai’s parachute refused to open—or perhaps the emirate simply fumbled as it reached for the ripcord.

In November Dubai threatened to default on a $4.05 billion sukuk, or Islamic bond, issued by Nakheel, a troubled property developer belonging to Dubai World, one of three government-owned conglomerates that set the pace for Dubai’s development. The announcement threw the emirate and the global credit markets into a vertiginous free-fall. As the ground approached, Abu Dhabi released more funds and the sukuk was eventually paid on time. But Dubai World’s other debts remained to be restructured. It was not clear who would get paid, how much or when.

However, on Thursday March 25th Dubai provided some answers to those questions. It announced no new money from its neighbour or anywhere else. But it spelled out in greater detail than before how its existing bail-out funds would be divvied up among companies, creditors, customers and suppliers.

This process will be overseen by the Dubai Financial Support Fund, which holds the purse strings and no doubt takes many of its cues from Abu Dhabi. The fund introduces crucial distance between the people who run Dubai and the commercial ventures they sponsor. It has been called a “value-for-money committee”.

The plan involves pumping a total of $9.5 billion into Dubai World and its offshoot. Nakheel will get $8 billion, as well as having an earlier $1.2 billion loan converted into equity. Dubai World will get $1.5 billion in new money plus the conversion of $8.9 billion of debt into equity. Of the fresh funds, $5.7 billion will come from loans already provided by Abu Dhabi. The remainder will come from the Dubai government’s own resources.

What will the companies do with this money? Dubai World says its outstanding debts to outside creditors amounted to $14.2 billion at the end of 2009, not counting the money it owes to the Support Fund or the money owed by Nakheel. It says it will repay the principal on its debts with new IOUs maturing in five or eight years. It said nothing about interest.

Nakheel itself still owes about $9.3 billion, including loans, bonds and payments due to suppliers. Holders of publicly traded debt instruments, such as its sukuk due this year and next, will be repaid as scheduled. For everyone else it is a bit more complicated. Nakheel’s bankers, including bilateral and syndicated lenders, will be paid in full but not on time. The company’s individual contractors and suppliers, who have suffered silently but deeply in this crisis, will soon get a cash payment of up to 500,000 dirham ($136,000). That should clean Nakheel’s slate with half its contractors, the firm says. The other half will have their claims settled by a mix of cash and a tradable IOU.

The deal also addresses Nakheel’s customers. Many provided money upfront for properties, some of them to be developed on artificial islands off Dubai’s coast, whose prospects are unclear. The company will either pay customers back over time (without interest), or offer them an alternative property that is closer to completion.

Dubai will now try to sell the deal to its creditors. They are likely to buy it. Indeed, many of them were on the co-ordinating committee that helped negotiate it. The restructuring broadly conforms to what bankers were expecting in October, before all the fumbling, flapping and falling at the end of last year. That ungainly descent should now come to an end. But it is still an awfully long way back up to the top.