Dubai World, the state-owned conglomerate, has reached a deal to restructure $23.5 billion in debt with its core lenders, addressing the most immediate of a string of problems facing investors in Dubai.
The deal, which includes no new money from the government and is broadly in line with proposals made in March, must still be agreed by banks outside the core negotiating panel, which holds 60 percent of the exposure, Dubai World said on Thursday.
Lenders will wait up to eight years to get their money back but have avoided a "haircut" on repayment under the terms of the deal, which offers 1 percent cash interest and an extra 1.5-2.5 percent per annum rolled up into a lump sum payment on maturity.
The restructuring has been hanging over Dubai since November last year, and its resolution will be a relief to investors in the emirate, which is still struggling with an over-saturated property market, sluggish bank lending and the risk of more debt problems.
"We are not entirely happy, but we are in a no-choice situation. Under the circumstances, this seems the best deal possible, even though it is not entirely satisfactory," said a banker at a Gulf-based lender outside the core group.
Dubai, famed for extravagant property projects and a tax-free lifestyle, has struggled to bring its debt burden, estimated around $100 billion, under control.
The Gulf Arab emirate used massive amounts of leverage to transform itself into a trade and tourism hub, but the global financial crisis and a collapse in oil prices in 2008 brought an abrupt end to a six-year boom.
The emirate stunned global markets last November when it said it would delay repayment of $26 billion in debt linked to Dubai World and its property units, Nakheel and Limitless. Dubai unveiled a $9.5 billion rescue plan in March.
"This closes the main chapter, but that doesn't mean we don't have a bumpy ride ahead," said Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments.
"There are still issues such as Dubai Holding and others, but this has been mostly discounted for. The air is not completely clear, but the main chapter is."
Speculation has centered on Dubai Holding — owned by the emirate's ruler, Sheikh Mohammed bin Rashid al-Maktoum — which has about $10 billion in outstanding debt.
Among upcoming Dubai debt maturities, Dubai International Capital, the overseas investment arm of Dubai Holding, has a $1.25 billion loan due in June. The company has said it will refinance the loan.
NO JUMPING FOR JOY
UAE markets edged higher as investors gave a muted reaction to the deal, while the price of insuring against default of Dubai debt edged slightly lower to 466.8 basis points, according to CMA.
"If this had come out two, three weeks ago, there would have been a much bigger impact, but the world has much bigger fish to fry," said Matthew Wakeman, EFG-Hermes managing director for cash and equity-linked trading.
"The terms are strong, but nobody is going to be jumping up and down for joy for a restructuring. The main thing is that it reduces uncertainty."
A successful debt deal may ease constraints on local banks, which have largely refrained from providing the credit needed by the UAE economy to emerge from the crisis.
Developer Nakheel's hallmark projects stud the Dubai landscape and provide a constant reminder that its audacious bid to transform swathes of barren coastline into a playground for the rich went awry.
Nakheel, which repaid a $980 million Islamic bond last week, is in parallel negotiations over its debt and has offered its trade creditors full repayment, with 40 percent in cash and the rest via an Islamic bond, or sukuk, which has a 10 percent annual return.
The disparity between the two offers has been a sticking point for some lenders, who feel that Nakheel has been offered a far better deal on the interest rate.
The Dubai World proposal offers repayment over five or eight years and allows lenders additional options, depending on whether they are local or foreign lenders and on the currency of their loans.
The proposal has two tranches covering the $14.4 billion owed to the bank lenders. The first tranche covers $4.4 billion, offers a five-year maturity and 1 percent cash interest but no additional lump sum payment on maturity — referred to as a payment in kind (PIK) — and no shortfall guarantee.
The second tranche covers $10 billion, comes with an eight-year maturity, offers 1 percent interest, and varying PIK rates and shortfall guarantees depending on the options lenders choose. The PIK rates range from 1.5 percent up to 2.5 percent in certain years of the maturity.
