Dubai can’t rely on friendly creditors
Whether a “careful plan” or strategic blunder, Dubai’s request for a debt standstill for its Dubai World holding company has rattled lenders who were counting on government support.
It will now struggle to contain the fallout for other Dubai-owned entities.
In the case of Dubai World, banks and other creditors have the option of rejecting the standstill and trying to enforce security over the holding company’s assets — which include the QE2 cruise liner and port operator DP World. But the legal process will be drawn out and recovery values unpredictable.
International creditors may struggle to persuade local banks to reject the standstill.
That would suggest an out of court restructuring is more likely, and that banks will push for the best terms they can get.
Much will depend on how the proposed standstill is structured, which is still not certain. Lenders may be unwilling to sign to an agreement that forces them to defer interest, because that would make it more likely that they will have to take additional bad debt provisions before the end of the year.
But while the banks may be prepared to take some pain or extend their debt, they will want something in return from Dubai and its wealthier neighbours. It’s not clear, however, how much Abu Dhabi is prepared to give to Dubai’s creditors.
The standstill is important because it affects much more than just Dubai World. It raises questions about Dubai’s willingness to support other businesses it controls. More broadly, it has upped the stakes for the United Arab Emirates as a whole. Bond issues have already been canceled. That could compel the UAE states to stump up more to limit the wider damage.
The threat of wider fallout potentially gives creditors a stronger hand in discussions. However, the creditors themselves are not a homogenous group. They include bond holders, large banks, and funds that have bought bank debt at distressed levels. They will have different exposures, bought at different prices.
Banks with large exposures and business interests in the region will have an incentive to seek as tidy a solution as possible. But the risk is that some smaller lenders act ahead of the others, refusing to roll over debt or seeking to call in loans. That could spark a rush for the exit, as banks seek to recover as much as they can from a range of Dubai companies. Dubai’s handling of the crisis so far has greatly increased that risk.