Thursday, May 20, 2010

Dubai World - Debt Rescheduling Deal Headline Terms Agreed In Principle


The press has been positively atwitter with news that Dubai World has struck a deal with its creditors.  

Even the normally circumspect The National is excited.  "Dubai World clinches US$23.5bn debt deal" trumpets its business page,  though it does note that: 
"The deal has been clinched with the seven members of the co-ordinating committee representing 60 per cent of Dubai World’s total bank lending over the “headline economic terms” of the restructuring proposals announced in March."
So what we have in effect is an agreement in principle with the creditors' committee on the very big picture terms - not on all the details.  A "bit" more work to do.  Presumably, the plan is to sell the basic plot line to the other creditors and then negotiate the details.

I haven't seen the structure outlined in the press - but I may have missed an article or two.

But we can turn to the press release  DW issued today.   Curiously, their press release has the more sober headline "Dubai World Agrees Headline Economic Terms in Principle with Coordinating Committee". 

The debt will be divided into two tranches:
  1. Tranche A:  US$4.4 billion.
  2. Tranche B:  US$10.0 billion with three options. 
  3. Detailed repayment schedules are not specified.
  4. Nor are interest rate margins.
  5. Nor is the nature of the shortfall guarantee - normal option or enhanced option.
  6. Each lender will receive a pro-rata share in Tranches A and B - with his choice of options in Tranche B. 
Tranche A
  1. Final maturity five years.
 Tranche B.
  1. Final maturity eight years.
  2. Options 1 and 2 are available to US dollar lenders.  
  3. Options 1, 2 and 3 to lenders in AED.
  4. Option 1- The Increased Shortfall Guarantee Option - Lenders in Tranche B #1 will benefit from  an increased shortfall guarantee if the borrower cannot refinance or repay at maturity.
  5. Option 2 - The Higher Interest Rate Option - Lenders in this tranche forgo the  increased government shortfall guarantee but get an unspecified "PIK" (payment in kind) interest.  As I understand this, it means that interest will be capitalized and paid at maturity.   Thus, on a present value basis, the nominal interest rate is higher than the effective yield.  They apparently get to "keep" the standard shortfall guarantee.
  6. Option 3 - An Even Higher Interest Rate Option - Lenders with facilities in AED  may forgo the entire shortfall guarantee (both standard and increased) but get a higher cash payment and PIK coupon.
It seems that DW is being sensitive to the needs of its creditors.  

Without specific details - many of which appear still being worked out -, I'm reserving comment for now.  The major issue will be the haircut even if as some journalists have noted it is no longer being referred to.  As mentioned earlier, most visible will be the IFRS accounting mandated haircut as any negative interest margin is going to be buried in the aggregate interest revenue and expense numbers of the individual banks.  While it be nonetheless real, it will be invisible.  And therefore to a good banker won't exist. 

That being said even at this stage there is one key comment that can be made:  a stock market tip.  

Look carefully at the names of the banks in the Creditors' Co-Ordinating Committee - they are responsible for 60% of the US$23.5 billion.  You now have a powerful insight into their original credit underwriting process.  And apparently their risk retention policies. Normally, you'd have to pay a lot of money to get  inside information like this.  Luckily, the banks have decided to defray the cost. so you don't have to . Adjust your portfolios accordingly.  Banks with weak credit underwriting skills and processes are likely to make the same mistakes over and over again.  "Sophisticated" lenders who believe in the Tooth Fairy and the Implicit Guarantee are just as likely to believe in some other mythical financial creature. 

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