Now the real game begins:
Lenders and representatives of government-controlled Dubai World are currently meeting to discuss modifying some US$26 billion of the company’s total US$60 billion of debt in a process that could take months.
A failure to do so could further delay the flow of capital to hotel owners and developers, said Rich Conti, president of The Plasencia Group, an asset management and consulting company in Tampa, Florida.
“It is important they do a restructuring and that it works out for them and their lenders,” Conti said. “If they can figure out how to get through this and survive from 2010 until 2015, what you’ll end up doing is giving the repaid money back to lenders. Hospitality and real-estate lenders can recirculate that money.”
This all goes back to the $10Bn lifeline of sorts given to Dubai by Abu Dhabi. I say of sorts because if you read the press release from December 14, there’son portion that sticks out (emphasis – mine):
Sukuk obligation due today
As a first action for the new fund, the Government of Dubai has authorized $4.1bn to be used to pay the sukuk obligations that are due today.
$10bn support fund
The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 – conditioned on the company being successful in negotiating a standstill as previously announced.
To me, that is a covenant test. They don’t say what the ramifications are if no standstill is negotiated, but the $5.9bn that is supposed to be available to Dubai may very well not be there for them to draw on.
Abu Dhabi didn’t give Dubai a bailout, they just gave them some time. Time to: 1) negotiate a standstill and then 2) restructure the debt.
But that’s $26bn that they’re looking to restructure. Not a small amount by any stretch. And in a market that is still liquidity constrained – no matter how much liquidity pump priming is done by governments around the world –
As for internal management and bookkeeping, this doesn’t help:
Even Chris Turner, former director of risk and assessment management at Istithmar World, a division of Dubai World, said the company did not know what its investments were, according to BusinessWeek. He said his team, in spending a year trying to put together a list of Dubai World’s holdings, found some loan documents and sales agreements in an office that had long been empty.
The Dubai World spokesman declined to identify Dubai World’s hotel holdings. “… as a private business, we simply don’t discuss this sort of information publicly,” he wrote in an e-mail.
Somehow, “oops” fails to capture the enormity of the problem. A multi-billion hotel and resort empire, with holdings across the world, can’t account for everything it holds, and what is owed.
But the real problem comes down to the fundamentals: Dubai World overpaid for the properties it bought and has too much debt. What’s the market’s appetite for restructuring the deals vs. trying to take some properties off Dubai World’s hands at distressed prices?
And the last line in the article is particularly telling. Mike Cahill of HREC Investment Advisors couldn’t say it any better:
“Capital markets are not just domestic, they’re international,” he said. “An impact in one country carries to another, then another and another.”