The Dubai Government has relinquished its spot at the top of Dubai World's financial pecking order as part of the debt restructuring proposal it announced yesterday, handing a victory to banks on a crucial sticking point in the negotiations. The Dubai Financial Support Fund (DFSF), a Government entity set up last year to receive and distribute aid to the emirate's state-owned companies, had been injecting funds into Dubai World last year on a secured basis.
That aid, which came in the form of loans, gave the DFSF a claim over Dubai World's assets that superseded the claims of its other creditors, who were owed US$14.2 billion (Dh52.15bn) as of the end of last year, Dubai World said yesterday. The senior status of the DFSF effectively meant that the Government would be paid before the other creditors in the event of a liquidation, a situation that did not sit well with a panel of seven banks representing Dubai World's 97 creditors.
One banker involved in the discussions said Nakheel, a property subsidiary responsible for a large part of Dubai World's borrowings, had received about $2bn of funds from the DFSF through Dubai World early last year, and additional money flowed into the company when it paid $4.1bn on an Islamic bond in December. The DFSF asserted its claim to the early Nakheel funds only about a week before Dubai World announced it would seek a standstill on debt repayments, the banker said, a move that struck some creditors as a late bid to dilute their claims against Dubai World's assets. It also wanted to claim future injections of funds, which became an obstacle in talks about a standstill agreement to delay repayment of debts while a restructuring was negotiated.
Those talks ultimately failed and the negotiations progressed to a restructuring with a de facto standstill in place under which banks agreed not to pursue legal claims to recover their funds. In the proposal presented yesterday, the Dubai Government said it was offering to convert the DFSF's $8.9bn in total claims against Dubai World into equity, a move that would place the fund behind the banks.
That conversion would not give Dubai World any extra money, but it would mean it would not be obliged to pay back injections made by the DFSF. The conversion of the DFSF's injections into equity was a key concession for the banks, but it may not address all of their concerns. While Dubai World said yesterday its debts to banks would be restructured into two loans to be repaid in five and eight years, it did not say what interest rates it would pay on those loans.
Bankers and analysts said that the rates could be lower than market rates, leading to potential losses for the banks. Banks must account for accepting a lower interest rate on an existing loan as a loss. Ziad Shaaban, the head of fixed income at EFG-Hermes in Dubai, said the Dubai World proposal might also be viewed negatively by banks because of its contrast with the offer to creditors of Nakheel.
Nakheel said yesterday it was offering market rates on its payments to trade creditors, as well as full and punctual repayment of its Islamic bonds due in May and next year. Nakheel's debt is estimated to be $10.5bn. "For the bank loans they're saying they'll pay in five to eight years, while the bonds they say they're going to pay now, so you have two creditors and you're paying each differently," Mr Shaaban said. "The banks may have a problem with that."
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