Dubai World creditors seek to cut exposure thorugh offloading

|TAP Special| Some foreign banks with exposure to Dubai World are believed to be planning to divest parts of their debt as they feel it may be a good time to offload to take advantage of improved confidence in Dubai. Obviously, the improving Dubai rating would mean more value to the debt.

$25 billion worth of debt is owed by Dubai World, which is keen to restructure the debt, including certain pre-payments as well as readjustment of payment schedules. The original restructuring was agreed to in 2011, but recently Dubai World announced that it was willing to make the next due repayment before time on the condition that the conglomerate would be given more time to make the remaining payments.

Lloyds has been mentioned as one of the banks keen to sell off more than $450 million of its exposure.

Bloomberg reported quoting sources that certain other lenders are also reviewing whether to change their exposures to Dubai World – most notably two banks which might potentially offload over $500 million of debt between them.

Dubai World and Lloyds declined to comment. The sources spoke on condition of anonymity because of the commercial sensitivity of the matter.

Under Dubai World’s original restructuring plan, it was scheduled to repay a $4.4 billion chunk of debt in May 2015 and an additional $10.3 billion in 2018.

The deal was supposed to allow time for the diverse conglomerate’s assets to recover in value, after they were hit by the global credit crisis and a property crash in Dubai. This would permit them to be sold to fund repayments to creditors.

Initially, many assets recovered only slowly and some, such as U.S.-based luxury retailer Barneys, saw their values drop. This inhibited the sale process.

However, some progress has been made in recent months and small repayments have been made to creditors, under a mechanism which distributes cash from asset sales once a certain threshold has been reached.

Dubai’s economic recovery has also helped, with other state-owned entities gaining the financial strength to take on assets from Dubai World companies, such as Investment Corp of Dubai’s acquisition of the landmark Atlantis hotel.

Under plans being discussed between Dubai World, its advisers and senior lenders including HSBC and Emirates NBD, the 2018 maturity would be extended to 2022, in exchange for early repayment of the full amount due next May, the two sources said.

The discussions have not so far included the full creditor group, and have not touched on whether a new interest rate would be set on the extended 2022 maturity, or on whether a new timetable for asset sales would be put in place, one of the sources added.

Dubai World will be hoping to use the emirate’s renewed economic strength, boosted by a resurgent local real estate market and growth in core industries such as tourism, to convince creditor banks to grant it additional time. Goodwill accrued from the small repayments made to date may also help.

If Dubai World succeeds, it may ultimately be able to pay back more of its debt with retained earnings rather than the proceeds of asset sales, allowing it to keep some key businesses which it would otherwise have to divest.

Other Dubai firms have already used improved lender sentiment to get better terms on their borrowings – the latest is DP World, which tripled the size of a $1 billion loan and cut its cost by a third last month.