The Dubai Double Down

I had been reading reports throughout the day, looking to understand what the $9.5 bn injection into Dubai World means.  I finally decided I ‘d just try and read the tea leaves from the official release, which I posted here:

First, something that seems to be overlooked is the new business plans Nakheel and Dubai World are supposed to present “which take into account the current business environment and reflect the new direction being given to both companies.”  That sounds to me like a change in strategy, but could also be changes that are more drastic.  Whatever it is, we don’t know it yet.  But no matter what it is, I’m sure their objectives for their investments have been adjusted.

$3.8bn of fresh cash will be put to work, and the other $5.7bn from the $10bn Abu Dhabi lifeline will be used to get to the $9.5bn amount everyone was talking about.  From here, the money gets split between Nakheel and Dubai World $8bn and $1.5bn, respectively.  The Dubai government will also convert its $1.2bn of Nakheel debt and its $8.9bn of Dubai World debt into equity.  So on the positive, this is a clear sign the government is subordinating its debt to the bondholders and bank lending syndicate, which will undoubtedly make those investors and lenders happy.  On the negative, we don’t know the terms of the debt-for-equity swap, so we don’t know how big of a stake the Dubai government gets in the companies for the debt it converted.

Plus, as the debt that needs to be restructured totals more than $26bn, this only takes care of the low-hanging fruit.  The easiest part.  The negotiations of the debt that is owed to bondholders and banks will be more contentious, I’m sure.  Because we’ll need to know a bunch of things I outlined last week.

One other thing that irks me at the moment: articles mentioned these actions were taken to ensure no distressed sales of assets would occur.  People have been saying that all through the saga going back to November.  But at the same point, the release also mentioned the restructuring would “allow Dubai World to focus on its core holdings and to manage and realise full value from its assets.”

Um, what’s a core holding?  Is CityCenter a core holding?  Is the QE2 a core holding?  How about the Cirque du Soleil?  Point is, we don’t know.  And we’re not going to know until that determination is made.  Most likely by punting “non-core holdings.”

At which time, I’m sure they’ll take whatever they can get for it.

Which by definition is a fire sale…

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Filed under finance, government, International, macro

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