While the World Bites Its Collective Fingernails Off Watching Greece…

There’s another super slow-moving train wreck happening over in the Gulf on the Arabian Peninsula.  That, of course, would be Dubai.

Here’s a brief recap, based on what I could gather from Reuters:

We know what the creditors won’t accept, according to this:

DUBAI, April 15 (Reuters) – Dubai World [DBWLD.UL] offered creditors a 1 percent interest rate on two new tranches of debt as part of its restructuring plan, but they rejected it as too low, two sources close to the discussions told Reuters.

via Dubai World creditors reject 1% interest -sources | Reuters.

So 1% interest is too low.  Well, duh it’s too low.  But you can’t blame Dubai World for trying, because if they can get away with paying that little, that just just shows how stupid the creditors are.  Alas, they’re not that idiotic.  But given where underwriting has gone, that’s not saying much…

But the same article tells us what’s more, shall we say, palatable:

The sources told Reuters that Dubai World’s 1 percent rate offer on the new debt was rejected by creditors, who countered the offer with one at market rate, which they estimated to be around 5 percent.

“That’s obviously too wide a divide, so negotiations are continuing,” a person familiar with the ongoing negotiations told Reuters.

Yeah, I guess so. You can drive an ocean tanker through that gap, no problem.  So good luck with that negotiating thing…

Meanwhile, a s _ _ t sandwich is waiting for UAE banks:

Banks in the United Arab Emirates have an estimated exposure of $15 billion to Dubai World DBWLD.UL, the state conglomerate that is holding debt talks with its nearly 100 creditors.

The circular allows local banks to avoid taking a full hit related to Dubai World in the first quarter, analysts said.

“Once the banks accept the (Dubai World) proposal they will have to announce the accounting impact,” said Deepak Tolani, a banking analyst at Al Mal Capital.” It (Q2 headlines) could be negative.”

via UAE banks likely to take Dubai World hit in Q2 | Reuters.

Once they accept?  Once they accept?!  There’s a gulf of 400bps between them at this point.  If we can see that gap close in a meaningful way in the next week, that would help.

But here’s what’s at stake:

It is expected that creditors will be proposed a low rate of interest, even zero, which would effectively result in an indirect haircut.

If banks agree to roll over loan repayments for five or eight years below market interest rates, they will have to adjust the valuation of their loan to reflect current market values, effectively taking a mark to market hit now.

via SCENARIOS-How might creditors react to Dubai World deal? | Reuters.

Well,we’ve already seen the low rate lobbed at the banks and that has been rejected.  But the second paragraph is telling.  The banks in the syndicate all face significant writedowns of their pieces of this deal.  And a mark to market hit won’t do a lot for the banks that are part of the syndicate, some of which are living off of state aid at the moment.

But the process is complicated, and there are plenty of moving parts:

Dubai World will need support from 66.66 percent of each class of creditor, such as banks, unsecured banks, sukuk holders and trade creditors, to seal the deal, said a source close to the matter.

But that doesn’t mean creditors in the minority are without any options.

Creditors unhappy with Dubai World’s restructuring proposal will have to take their grievances to a special tribunal, set up in December to oversee the restructuring of Dubai World’s debt and settle any disputes that could arise from it.

So what happens if they don’t agree?

If Dubai World’s proposal is not accepted by a two thirds majority, the entire plan could be called into question. A unanimous rejection is highly unlikely.

No, I guess a unanimous rejection is probably not a likely scenario.

But rejection by 33.35%?  Well, that’s a different matter altogether…


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Filed under finance, government, International, macro, Markets, risk management, Way Forward, You're kidding

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