Gleeming, Glittering Towers… of Shaky Debt

So what has been happening in Dubai?  Looks like the time is right to check back in:

Dubai World is working on a plan to issue new tranches of debt to creditors in its proposals to restructure US$26 billion (Dh95.49bn) in loans, say bankers close to the situation.

The plans, which are still to be finalised, were informally put to representatives of the creditors’ co-ordinating committee last week and are due to be discussed today with the Dubai authorities

via Dubai World may offer new debt to creditors – The National Newspaper.

So at least we have a draft proposal being put forth to the creditors.  That shows some folks have been trying to figure out what to do.  After all, they have a lot of debt to roll.

Any color on the proposal?  Well, yes.

“What they [Dubai World] came back with was not as bad as most banks had anticipated. Under this plan they would refinance several different tranches. Some would come with zero interest and some with reduced interest rates,” said one banker present at the informal meeting last week.

Zero interest?  Rate concessions?  I don’t like the sound of this one bit.  This is akin to HAMP for exotic commercial real estate.  There will have to be new appraisals.  New cap rates.  New NOI projections.

All for projects that will throw off less cash, are worth less, and will yield even less to their lenders than before.  The banks may have only been making 200bps in spread before.  But now that will be close to 0.

Some other bright ideas:

Among the possible scenarios are: repayment in full over five years but with no interest paid in that period; repayment over seven years with interest at about 2 per cent; repayment over a minimum of eight years with interest paid at close to the one-year London interbank offer rate (Libor).

This has all the looks of a total train wreck.  The banks would be better off trying to find either an acceptable equity stake or brokering a deal to sell off part of the debt as equity.  $9-10 billion may be a pretty good starting point, with somewhere between $7 billion and $12 billion being the ultimate amount converted.  It just depends on how much Dubai World would offer and how much a distressed investor might be looking for.

But that’s not going to happen.  At least not initially.  No, I think the bankers and the Dubai World developers will need to go through another round or two of this over the next few years.  They’re all of the mindset of avoiding the day of reckoning;  somehow trying to dodge the ultimate point of recognition.  An debt-for-equity offering would make the realities of the projects and the debt all too clear in many ways, so nobody has an interest in doing it.

For now.

So in the meantime, we’ll just follow the instructions on the back of the shampoo bottle:

Wash, rinse, repeat.

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