Dubai World seeks 4-year delay in repayment

Investment conglomerate Dubai World may resort to a familiar, but in recent times rarely used, legal mechanism set up at the height of the emirate’s financial crisis to obtain the backing from its creditors to postpone a crucial debt repayment deadline.

The state-owned firm and advisor Blackstone are currently discussing with an increasing number of lenders the terms of a deal that proposes to push back the 2018 repayment date of the state firm’s largest chunk of debt ($10.3 billion) by four years, people familiar with the matter said. As part of the offer, creditors would be repaid earlier the $4.4 billion debt tranche that is currently due in 2015.

The rationale behind the extension of the 2018 deadline is as follows: Dubai World officials hope that the emirate’s recent economic recovery will gain further traction which will support the company’s business outlook and raise the value of its assets. Bearing in mind that the World Expo will be held in 2020, Dubai World is buying itself a few more years to gain a more favorable position as it finally tries to draw a line under its $23.5 billion debt ordeal that began in 2009.

Advisors working with Dubai World said the option of using Decree 57 is again on the table in case any creditors decide to oppose the plan.

Decree 57 is a legal mechanism set up in the aftermath of Dubai’s debt debacle in 2009 that handles litigation related to Dubai World and its entities. It was notably invoked by shipping business Drydocks World in 2012 to force renegade debtors into accepting its $2.2 billion debt plan.

The possibility of using Decree 57 seems especially aimed at hedge funds who may threaten to litigate in order to push for better terms. “Once there is two thirds support for the plan, we can invoke Decree 57 to force everyone on board,” said one of the Dubai World advisors.

As the revised debt repayment plan is under discussion, it appears two camps are forming among the nearly 100 creditors. On the one hand, there are the “relationship” banks that remain bullish about the long-term outlook for Dubai. They include U.K. lenders HSBC, Standard Chartered and, for obvious reasons, Dubai’s “house bank” Emirates NBD. Those lenders are likely to accept Dubai World’s debt extension plan.

On the other hand, there are a number of banks that would rather see 2018 as the closing date of their business relationship with Dubai World which has been overshadowed by the debt debacle. This group includes Royal Bank of Scotland and Lloyds TSB, lenders who have been gradually cutting their exposure to the region and who would have little appetite to hold Dubai World debt beyond 2018. Both banks have resigned from the Dubai World coordination committee, the body that serves as interlocutor between company and creditors, and are trying to offload their exposure.

“They (Dubai World) can always try to extend the repayment, we would like to see our money back in 2018 as promised,” said one official at another international bank.

For Dubai World, it is now a matter of securing sufficient support from its main creditors. Or to be more precise: it requires the approval of lenders representing two thirds of the debt owed before it can trigger Decree 57.

Depending on how many creditors of Dubai World buy into the emirate’s optimism about its economic resurgence, Decree 57 could make a comeback soon.-WSJ