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.