Analysis of Dubai Government 14 December Statement on Restructuring Dubai World

Below the dotted line is the text of the announcement made by the Dubai Government on 14 December 2009 regarding the US$10 billion  support from the Emirate of Abu Dhabi and the restructuring of Dubai  World. My comments are in blue italics. One caveat:  My analysis is based upon the press release having been  crafted with the import of each word and sentence carefully considered.   That may not have been the case for a variety of reasons, including time  pressure.  That theory is somewhat supported by the fact that there are  two almost identical press releases issued by Dubai within less than  one hour. ------------------------------------------------------------------------------------------------------------------------------

WAM Dubai, Dec14th, 2009 (WAM) --- Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee (SFC) reassured investors, financial and trade creditors, employees, and citizens all out support of the government and has said that Dubai is, and will continue to be, a strong and vibrant global financial center. "The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy", he said in a statement on Monday. "The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders," he added.  AA:    With the apparent agreement of the Emirate of Dubai, Nakheel has paid the holders of its US$3.52 billion sukuk US$4.1 billion.   That is, the holders of the sukuk are not being asked to participate in the restructuring – either in terms of a retiming of their repayments, the interest rate thereon or the amount of any adjustment ("haircut") of principal. Assuming that the point of the rescheduling will be to ask other creditors to accept some or all of these steps, exactly how  are the interests of all stateholders being served? If this payment is a preference of one group of creditors over another, precisely what "high standards" have been applied?     The Government of Dubai, acting through the Supreme Fiscal Committee ("SFC"), today announced a set of actions in relation to Dubai World. Full text of Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee statement: Like other global financial centers, Dubai has faced recent market challenges driven by global economic slowdown and severe real estate market correction.  Recently, Dubai World announced that it might not be able to commercially support its obligations. Since that time, the Government of Dubai has worked closely with the Abu Dhabi Government and the UAE Central Bank addressing and assessing the impact of Dubai World on the UAE economy, banking system and investor confidence.   AA: This sounds the theme of separation between Dubai World and the Emirate. Something that I have noted that careful lenders and investors should have been aware of from day one. The following provides comprehensive set of actions: First, the Government of Abu Dhabi and the UAE Central Bank have agreed to provide important support. Specifically, the Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World.  AA: Does this mean that other creditors (in addition to Nakheel sukuk-holders) will be paid their obligations.?   Simply because those obligations come due before others?  Meaning that those creditors whose obligations are not so temporally favored will have to reschedule their obligations?     Perhaps, more importantly, note the words "has agreed to fund".  This implies that the full US$10 billion has not yet been disbursed. As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today. The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 - conditioned on the company being successful in negotiating a standstill as previously announced.  AA: This does not appear to contemplate any repayments of principal.  Yet the paragraph prior to this one specifically mentions "upcoming obligations". Are these only interest? Or do they just comprise trade creditor obligations?   Crtically, how is the support conditioned?   Will Abu Dhabi only disburse the funds if a standstill is negotiated? A bit of leverage to use against the creditors.  Though  this admission is a two edged sword.  If Dubai World cannot pay interest on its obligations absent this cash infusion, how will it pay the obligations themselves?  This deferred disbursement mechanism also gives Abu Dhabi significant leverage over Dubai.    In addition, the Government of Dubai is particularly focused on addressing the concerns of Dubai World trade creditors within the Emirate of Dubai. To help address these concerns, today the Government of Dubai is announcing that the remainder of the funds provided will be used for the satisfaction of obligations to existing trade creditors and contractors. Discussions with affected contractors will begin in short order.  AA: The concern is stated as being particularly for trade creditors within the Emirate of Dubai.  Does this mean that those outside will not receive the same treatment? It is also unclear how much is the amount (the "remainder of the remainder") to be devoted  to this group of creditors. Within DW's trade creditor group within the Emirate of Dubai, will only past due amounts be paid?  Here I have the same question about "preferences" though on a temporal basis rather than geographic basis. Next, the central bank is also prepared to provide support to local UAE banks.  AA: Two reasons this support might be necessary.  The first because other banks refuse to lend  some UAE banks over concern about  their creditworthiness related to exposure to Dubai World.  Here the CB UAE would provide liquidity support.   The second because the local banks were potentially subject to serious losses on their DW exposure.  Here the CB UAE would provide various forms of support including perhaps capital infusions. On 29 November the Central Bank announced additional liquidity support for both local and foreign banks in the UAE.   Is thie press release merely restating this support?  Or is this a new statement related to the second rationale for support? Finally, today the Government of Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.   AA: A not too subtle hint to creditors: do a deal or face the consequences.  Realistically, the law and court will probably have to be resorted to in order to secure creditor approval of the restructuring package. The "new" law provides that if more than 75% of creditors vote for a reorganization plan it is accepted and binding on all creditors, which provides a much needed cramdown mechanism. Explained in more detail in this earlier post.   Today's actions, taken together, demonstrate our strong commitment as a global financial leader to transparency, good governance, and market principles. There will certainly be challenges periodically, just as there are challenges in other major financial centers around the globe. We believe today's actions will best serve the interests of all stakeholders.  We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices. Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come.  The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy. The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders." WAM/AMIR