We are approaching endgame in the negotiations between financial creditors, who are owed US$14.4 billion (Dh52.89bn), and Dubai World.
But there is many a slip twixt cup and lip and this saga, which has been running since last November when Dubai World first called in the restructurers, still has the capacity to surprise.
So far, after the confusion of the initial restructuring announcement, it has gone pretty smoothly. Other restructurings in the region have been far more time-consuming and confrontational. The Investment Dar in Kuwait is still locked in legal wranglings with a rump of dissident creditors; Global Investment House also had a tough time persuading creditors to accept reduced terms.
Dubai World managed to put together a proposal by the end of March and got agreement on it from the seven banks that make up 60 per cent of the lending last month. That’s good progress, given the size of the debts and the number of banks involved.
The company says its financial debt is held by 73 banks, including the seven members of the co-ordinating committee (CoCom) that have gone for the deal. That means there are 66 financial institutions still to be won round, largely in Europe, the Middle East and Asia (American banks did not join the Dubai World lending club to any significant degree, it seems).
The motives of the 66 will be varied and influenced by individual circumstances. The credit manager of a small bank in southern India, for example, might take the view that his couple of million dollars on loan to Dubai World is not worth fighting about and accept the terms on offer.
His counterpart in Europe, on the other hand, is going through his own debt crisis and may decide that every cent counts in the current situation. His bank may be more likely to fall into the ranks of dissidents that are still not accepting the deal recommended by the CoCom.
Some analysts have said the process of trying to win potential dissidents over to Dubai World and the CoCom’s way of thinking resembles an old-fashioned English sheepdog trial. Each CoCom member has his own flock of banks to tend with the aim of getting them into a pen marked “accept the deal”.
Of course, there is always one errant animal that strays but the poor brute is usually persuaded, cajoled and threatened into the pen in the end. This is what Dubai World and its advisers hope will be the case with the 66.
The creditors have one option that is not open to the sheep: they can get out of the field altogether by selling their debt. This has already happened in at least one case, as was reported this week, with a $25 million tranche sold at 55 per cent of face value. This was a pretty good deal by all accounts, as experts in the second-hand debt business reckon between 40 and 50 per cent is a more realistic value for any future transactions.
Will there be more sellers? There could be, with a variety of motives. On the one hand, they could be so outraged by the low coupon on offer in the Dubai World proposals, 2 per cent at best, and the long payback time, up to eight years, that they sell in protest. On the other hand, they could be under such credit pressure themselves that they just want to pull in some cash, even though they are taking a big hit.
The buyers’ motives are more mysterious. They might be serious long-term investors taking a bet that Dubai will come good and that their investment will pay off over the years. But they are just as likely to be arbitrageurs and hedge funds that believe they can tweak a bit more out of Dubai World.
These professional debt-dealers are likely to meet a stone wall of refusal from Dubai World. The company and the CoCom of creditors have quite a formidable arsenal of weapons at their disposal to deal with dissidents.
Creditors could go for a “buyout”, for example, where those banks in favour of the deal simply buy the debt from the doubters in a series of private transactions. Maybe the $25m transaction reported earlier this week was a “buyout” deal: we are unlikely ever to know for sure.
The other option is a “squeeze-out” in which the non-approving banks are forced by legal process to accept the terms. This is happening in Kuwait at the moment with The Investment Dar and is made all the easier in Dubai by Decree 57, the law that set up a special tribunal at the Dubai International Financial Centre. When Dubai World gets approval from bankers representing more than 66 per cent of its debt, it could begin this process.
Finally, there is the “nuclear option” that the bankers call a “re-doc”. In this scenario, approving creditors would simply freeze out the dissidents and issue new documentation (re-doc) to refinance the debt.
The hold-outs might claim default on the original debt contract but this would not be recognised by the approving creditors or the company. A re-doc is the ultimate cold-shoulder from the international banking community.
Any one, or none, of these tactics might be used in the Dubai World situation. We will have a much better idea of the level of dissidents by the time an all-bank meeting is held, probably in Dubai but maybe in London, some time in the next few weeks.