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First with Financial Comment from Arabia

$22bn Dubai World debt rescheduling to be completed this week?

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There is rising optimism among bankers close to the ongoing discussions that the $22 billion Dubai World debt rescheduling process could be completed as soon as this week.

Readers will recall the worldwide uproar over the Dubai debt crisis late last year that ended as suddenly as it began with the intervention of Abu Dhabi and repayment of a $4 billion Nakheel bond in full and on time.

Speedy action

It could well be that what are widely predicted to be long and agonizing talks between the Dubai authorities and Dubai World’s bankers are actually wrapped up much more quickly than expected.

A speedy resolution to this issue is desirable from both sides. Dubai wants to gain some of its lost credibility with the global banks and remove something that hangs over the local business sector like a dead hand. Dubai wants to be moving forward again as the hub city of the region.

There is also pressure from Abu Dhabi to wrap things up as its own credit ratings are now being downgraded because matters remain unresolved in Dubai. And as Dubai will be dependent on Abu Dhabi for financial assistance over the next few years that counts enormously.

Bankers also have little desire to see this matter fester. It is leading to speculation that write-offs may be bigger than expected. It is holding back their other lending opportunities in the UAE. There is a feeling that it is better to get bad news out of the way and move on.

From the early hiatus in the Dubai debt crisis that never actually was a real crisis, given that Abu Dhabi did emerge as a lender of last resort, the debate has moved on. The Dubai World debt – already down from $26 to $22 billion as a result of the bond repayment – is seen as a matter of a failed commercial building program, not an issue of a sovereign guarantee that was never actually there.

Commercial failure

In normal commercial liquidations banks generally have first rights to whatever money can be realized from assets sold by the liquidator. Apparently what is being offered for Dubai World is much better than that.

Zawya Dow Jones reported last month that creditors may be offered 60 per cent of their money back in exchange for rescheduling debt over several years, with no coupon but crucially with a sovereign guarantee.

Banks are hardly happy with this haircut but it is better than being left with no hair at all. And unless they feel additional negotiation will produce a better deal they will settle, and the general feeling is that prolonging negotiations might lead to a worse settlement and damage to ongoing business.

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Written by Peter Cooper

March 9, 2010 at 10:18 am

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