Monday, June 14, 2010

Dubai World - Implication of Loan Sales

The Financial Times reports that some banks have begun selling their almost restructured DW loans.  Apparently, the price is something in the 55% of nominal range.   The article goes on to say that DW is considering using "Decree 57" which created a special regime for DW to seek protection under the DIFC Insolvency Law.  Under that law, a company may cram down dissenting creditors and force them to accept a restructuring - similar to the Financial Stability Law in Kuwait.

Some observations:
  1. It's not surprising that some banks would be heading for the exit and perhaps taking a larger than required "haircut" just to be free of the restructuring - including those often overlooked indirect costs of administering and following a "special" loan.   Exitors will generally be smaller banks with no real ongoing business with the Emirate.
  2. A US$25 million sale out of US$23.5 billion does not a trend make.
  3. It's unlikely small trades will give dissidents control unless the existing lenders are highly divided on the restructuring.  On this topic recall that the Co-Ordinating Committee accounts for some 60% of the debt.  Local lenders are likely to go along.  If required, local governments can promise them a capital infusion or low cost deposit to compensate for any direct pain they may feel on the restructuring.  Both methods of course would strictly speaking not constitute preferential treatment.
  4. From an investment point of view, assuming a bullet repayment, the IRR on the cited transaction is something around 11%.  With more frequent principal repayments the IRR is higher.  Not a bad return.
  5. The public announcement of the readiness to pull the DIFC trigger no doubt is designed to dissuade vulture investors.

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