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$9.5bn in new funds but months to close $26bn Dubai debt deal

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The Dubai Government is to provide up to $9.5 billion in new funds as a part of the final rescheduling deal for the $26 billion debt mountain at Dubai World’s real estate companies Nakheel and Limitless. But closing this deal is likely to take several months.

A government statement issued on Thursday morning said: ‘The government of Dubai, acting through the Dubai Financial Support Fund, will support these proposals with significant financial resources, including a commitment to fund up to $9.5 billion in new funding over the business plan period.

‘This will be funded by $5.7 billion remaining from the loan previously made available from the government of Abu Dhabi and from internal Dubai government resources. The restructuring process is expected to take several months to implement. The tribunal process remains available to protect the companies, their creditors and other stakeholders.’

Debt crisis

Last November Dubai World sent world financial markets into a frenzy with news that it was going to delay paying all its loans until this May. Since then there has been constant speculation about the status of talks with rumors about debt haircuts and guarantees from the Dubai Government.

Today’s statement provides a partial solution as it becomes clear that new funds are to be made available from Dubai Government to alleviate the debt mountain. The Dubai Financial Market immediately surged on the news which goes some way to relieving the uncertainty that has hung over the market since last November.

However, the devil will be in the detail of the deal which is still someway off. There will also be some further reflection on the true value of the total debt outstanding in Dubai. The local magazine Gulf Business recently published table of bonds and loans showing $6.6 billion due this year, $24.6 billion in 2011, $12.4 billion in 2012 and $16.9 billion in 2013.

Short-dated loans

This is indeed the problem for Dubai. Its debt carries such short maturities. So while the Dubai World debt rescheduling is the biggest debt issue, it is by no means the only debt to be repaid on the horizon.

Thus while the news today is progress indeed, and will be a big relief to bankers who feared a far worse outcome, this is still an opening chapter in winding up an enormous loan book.

What clearly needs to happen is for much of this bank debt to be replaced by long-term bonds issued at rates of interest that Dubai can comfortably pay. One way or another that will happen.

Key proposals

Meanwhile, the auditors responsible for restructuring Dubai World issued the following statement outlining the key principles for the deal:

‘The total amount of outstanding debt held by Dubai World’s creditors, excluding the existing Dubai Financial Support Fund’s claims, is $14.2 billion as at 31 December 2009.

‘The Government of Dubai acting through the DFSF is proposing to convert $8.9 billion of debt and claims, representing 38 percent of the total amount of standalone debt and guarantees of Dubai World, into equity, subordinating its claims to other creditors.

‘In addition the DFSF will commit to fund up to $1.5 billion of cash into Dubai World to fund the Company’s working capital and interest payment commitments that will arise from the new debt facilities.

‘Non-DFSF creditors will receive 100% principal repayment through the issuance of two tranches of new debt with five and eight year maturities.

‘Dubai World has a number of strong companies within its portfolio and it will continue to focus on improving the performance of these assets to generate value for stakeholders. The Tribunal framework, established by the Government of Dubai in December 2009, remains available to protect Dubai World and its companies, their creditors and other stakeholders.

‘A restructuring plan regarding Nakheel, the other entity affected by the restructuring programme initiated by the Government of Dubai on 25 November 2009, has also been presented to Nakheel’s creditors and is covered in a separate statement today.

After careful review, Limitless has also been excluded as it does not require Government support. All other Dubai World entities continue to be excluded from the restructuring process.’

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Written by Peter Cooper

March 25, 2010 at 10:50 am

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