The news that rattled the financial markets first broke in the form of this official statement from the Dubai government (“amateurish” by The Financial Times standard) on the eve of Eid, as the emirate closed down for four days over a week ago: “Dubai World intends to ask all providers of financing to Dubai World and Nakheel to ‘standstill’ and extend maturities until at least 30 May 2010.” This shock came just weeks before Nakheel’s $3.52 billion Islamic bond or “sukuk” matures on December 14.
We've advised corporate clients on a number of loan workouts during my investment banking years and I can tell from that experience that Dubai World's "standstill" request, though it may sound benign and orderly, belies a financial condition that is very challenging to resolve. And given what little we know about Islamic finance, we could already visualize a messy next chapter to this unfolding story.
The Score on Dubai World's Debt
Like where all loan workouts should start, let's take stock of Dubai World’s financial situation. The company's total consolidated liabilities (including unpaid invoices and other non-debt obligations such as land grants) reportedly stands at around $60 billion, of which $26 billion is debt on the table for restructuring. Of the latter amount, $5.5 billion is syndicated debt and about $6 billion are Islamic bonds or “sukuk” issued by its property unit, Nakheel, including a $3.52 billion “sukuk” that matures on December 14. The balance is reportedly made up of non-syndicated loan obligations of Dubai World companies with individual lenders. Unfortunately, there are no available details on the latter.
Just three days from today, the $3.52 billion Sukuk issue, which won for Nakheel the Middle East "Deal of the Year 2007" awarded by Banker Magazine and the "Ijarah Deal of the Year" at the "Islamic Finance news Award" in 2007 for being the world's largest Islamic-compliant bond, will come due. I'd say that, judging on available information, it is almost definite at this point that this bond could not be repaid at maturity. The Dubai government had said last week that it was not responsible for the debts of Dubai World, disappointing creditors who assumed that the emirate would guarantee the liabilities.
Now, that's just for starters. Over the next four months, according to this source, "Dubai World is obliged to repay a total of $9bn of debt." Moreover, as reported by The New York Times here Dubai World would have no respite from the debt gauntlet till June 2013 as things stand today. That to me is a very tight time frame for a heavily indebted company with serious cash flow problems and crumbling access to the international debt and capital markets.
Prospects Moving Forward
Thus, if creditors reject Dubai World's "standstill" proposal, thereby closing the door to an orderly restructuring of its huge pile of debt, the full consequence of this move could be anybody's guess. What seems obvious over the short-term is that this would nudge Nakheel's maturing Sukuk into a default situation (after a two-week "curing" period from December 14) which leads to legal proceedings. Beyond me saying that, it's difficult to hazard a guess because of the complex issues involved in "Shariah"-compliant Sukuks (you may want to check this out for a backgrounder on this matter) and the fact that "there is little precedent for arbitrating the unique terms of these instruments."
Now, on whose head hangs the proverbial Sword of Damocles? Keynes was right--it hangs over the collective heads of the Dubai World creditors who glossed over or, worse, failed to understand, the risks they were getting into.
(Photo courtesy of Google Images)
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