Wednesday, September 8, 2010

Dubai Holding: Some Creditors Selling Debt

Asa Fitch over at The National reports that some creditors are looking to exit their exposure to Dubai Holding - DHCOG and DIC - through secondary sales at a hoped for modest discount.

This makes eminent sense in view of the many indirect costs associated with carrying distressed debt.  Costs of additional internal reporting and monitoring for credit purposes as well as for accounting purposes (both book keeping and disclosure).  

On top of all of this, if a creditor feels there is the possibility of an impairment, the decision to close the file  now, recognize the loss and move on may be highly appealing, particularly if there is no long term relationship.  Or if such a relationship is not perceived as being sufficiently profitable in the future.

Clearly, this strategy does not work with banks holding sizable shares.  Unloading a $5 million or US$10 million "bit" is a lot less painful than $50 million or US$100 million.


Laocowboy2 said...

While nobody loves a loss, this is actually a positive. Once the debt has been concentrated in the hands of hopefull longer term holders with a knowlege of (and interest in) the region, doing creative things may be more possible. One examople would be to use (discounted) debt as part of an investment in a new Quasi-governmental joint venture project.

Hopefully however, the longer term holders will not include too many of the distresed debt funds - if they are in to play, the playground may get rough.

Diogenes@Sinope said...

There have always been rumors floating around like this, but I don't think we've seen a real material move in the debt. Also, on the more negative side, not sure what happens if a distressed debt HF gets some of those loans. Not clear to me what sort of covenants/protections there are.

Abu 'Arqala said...


Usually the covenants protect the holders of the debt. The protection, if any, for the borrower is in the terms of the covenants and the amount required to call a default.

In both loans and bonds, a critical factor is the amount of debt held which can block an action.

For bonds, the threshhold is generally a low 25%. With loans generally more - over 33% is an average guesstimate.

Abu 'Arqala said...


An interesting idea. I think by and large the sovereign debt conversion experience in Latin America was not wildly successful. Unless of course one counts the construction projects (tourism) where "clever" investors were able to repatriate their principal through invoicing "magic" on construction and similar fitting out costs.

As to HF, they're an interesting group. I've seen ongoing return oriented ones - very happy to play ball in a restructuring where they felt the underlying loan would be paid off. Those were admittedly cases where the price of entry was below 50%. If DH offers low interest rates, this scenario may not pan out.

In other cases they were buy and dump right after the price went up. Bank trading rooms were proficient in this - particularly when they could get an inkling of which way the negotiations were going.

And finally there were those who wanted two kilos of flesh and looked to make trouble. Their leverage then depends on whether (a) they're in a syndicated loan and can exercise a liberum veto or (b) hold by themselves or in concert a blocking stake in bond/sukuk.

My guess is that unless DH is in much worse shape than DW, the discounts on offer are likely to be relatively modest bounded say at 20% but probably lower.

That should limit the ability to sell.