I’ll Take ‘Extend & Pretend’ for $500, Alex

I wonder what happens when you run out of road to kick the can down…

LONDON—Dubai World may ask creditors for five to eight years to re-pay its $22 billion in debt as part of a restructuring proposal that could come as early as this week, people close to the matter say.

The Emirates-based, conglomerate and its creditors are also weighing a structure that would give creditors a share of the proceeds from asset sales, or possibly a share in future profit of the group, if it cannot fully meet its interest-payment obligations, one of these people said.

via Dubai World’s Long-Term Debt Plan – WSJ.com.

Maybe I’ll ask again at a later time.  Looks like governments can still get asphalt cheap these days to build roads to kick cans down.  A lot of Dubai World’s debt was supposed to roll this year, but with a proposed extension, I have a few questions:

  • 5-8 years?  At what spread to LIBOR would this be priced at?
  • The original $22bn was lent against assets that had a certain valuation.  A valuation assigned in the credit boom years.  What valuation will these assets have now?
  • Valuation in commercial real estate (CRE) is based on assumptions about net operating income and capitalization rates.  How much of a haircut will the NOI have and how much higher will the cap rate be?

That should be enough without melting brain cells now.  The Journal’s article goes on to lay out a dire alternative to the extend and pretend program:

Extending the time-frame to re-pay the debt would be an alternative to a government-backed proposal that would pay creditors back much faster, but with a 40% “haircut” for creditors. U.K. banks favor a full repayment over a long time period, a person close to the matter said.

And of course, there’s the question of which assets might be sold to repay the debt:

Dubai World representatives haven’t indicated which assets they might be willing to sell in order to pay creditors. The conglomerate owns assets as varied as DP World, its giant ports operation, a $5 billion investment in a Las Vegas casino development with MGM Mirage, and a 20% stake in Canada’s Cirque du Soleil Inc. performance troupe.

Cirque du Soleil?  Cirque du Soleil??  City Center doesn’t surprise me, and I spoke about that months ago.  There was talk of a sale of the QE2 cruise ship as well.

But Cirque du Soleil?  This is the sovereign equivalent of turning over the sofa for loose change when the pizza delivery guy arrives with those 3 large pizzas, some wings, some breadsticks,  and sodas.  Plus a beer guy just arrived with a couple of kegs.  And a caterer who has a large deli tray.  Plus a shrimp cocktail plate.  It has all gone horribly wrong and your party of the century – which has to be bigger than last week’s party of the century – hasn’t even started.

No matter what happens, this will end in a trail of tears…

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