Dubai World Changes "Tack" on Debt - May Forego Standstill?

 

 

Today's The National (Abu Dhabi) has an interesting article under this title.

Here are the main highlights (but please read the article in full as a prelude to your own evaluation of my comments):

1. DW is hopeful it can craft a deal with creditors without necessarily formalizing a standstill.
2. It hopes to accomplish this before an April 30 deadline. 
3. The Group's many subsidiaries, its intricate network of joint ventures and other investment links complicate the efforts to value its assets.
4. Until value can be established no restructuring plan is likely to be crafted or accepted by lenders.
5. DW and the Creditors' Committee are in weekly meetings - in person or via phone.  
6. "That kind of co-operation appears to be behind Dubai World's hopes that it can win a restructuring deal without getting a standstill agreement first".
7. Efforts to obtain a standstill have "run into headwinds" over bankers' objections to the DFSF's insistence that its loans have priority over existing creditors.
8. DW has a trump card with the DIFC.  It can go to the Court and get up to 10 months' grace to negotiate with lenders.

Let's step through these observations one at a time.

1. There is no reason that a standstill is required to craft a restructuring agreement or finalize one.  The purpose of a standstill is to keep a creditor from lodging a lawsuit and complicating matters.  Even if a lawsuit is filed, as happened with The Investment Dar in Kuwait and in fact happened more than once, a deal can be pushed through.
2. DW hopes to (a) craft a restructuring deal and (b) secure bank acceptance by 30 April 2010.   That is 73 days from now.  I think that would be quite ambitious even if there wasn't the apparent problem there is in sorting out DW's assets (Point #3).  That wrinkle is going to add to the time.  Once the accountants prepare their report on asset values and holdings, a series of asset cash flows are going to have to be prepared.  This will also include some asset sales.  On that issue the borrower is going to want to delay these in the hopes that values will recover. Lenders are going to have an oppositie view:  give me the cash now.  So even if there were no issue over asset values and ownership, 73 days would be extremely ambitious - especially given that DW's creditors are such a diverse group of creditors with so many different types of instruments.  Also I'd note that the 30 April deadline is an artificial one.  It could as easily have been 15 April or 31 May or 22 November.  Deadlines are useful tools to get peoples' minds focused, but if need be, they can be changed.  If an extra two weeks or two months were required, no rational person would destroy the company.
3. I think I've misunderstood the point about the difficulty of valuing DW's assets.  Presumably, all the DW Group companies have financials prepared according to IFRS or some other globally recognized accounting standard.  And all have been audited by major international firms.  One can't imagine that major international lenders - even the credulous sort who believe in the Implicit Guarantee - would plunk down US$22 billion before first obtaining satisfactory financial reports.  Accounting principles require that a firm's financials reflect only the assets it owns or controls and set standards for valuation.  So is the problem that the financials were improperly prepared? Is that the meaning of the phrase "sorting out the mess"? As part of an audit, the accounting firm should confirm a representative sample of both assets and liabilities.  Generally, major assets would be chosen for this.  So, for example, the auditor would take on faith that office equipment belonged to the company.  But  it would check to make sure that legal ownership and title of major holdings of shares, of bonds etc were confirmed by a third party.  Not necessarily each and every one, but enough to form a reasonable basis for concluding they belonged to the company.  The next step would be to  review the basis of valuation.  IAS #39 has some fairly strict requirements for assets carried at fair value - mandating which ones have to be carried at fair value and outlining acceptable methods for valuation.  That of course does not mean that the values are correct nor that the auditor certifies the values.  Nakheel's auditor, a major international firm, gave the company a clean audit opinion on its  2008 fiscal year financials.  As late as 26 November 2009, when it reviewed but did not audit Nakheel's 30 June 2009 financials, that same international firm did not express any concern over valuation or ownership of assets.  Rather its only adverse comment was about funding difficulties.  Is the problem that the auditors did not carry out their engagements properly?  And thus are part of the "mess"? Both of these are rather serious charges.  Or is the problem that asset values are uncertain? Welcome to the real world.  Once one leaves cash and near cash equivalents, values are uncertain and fluctuate.  One can get an appraisal/valuation of assets but  that comes with all the uncertainties that asset valuation entails.   
4. An eminently sensible position: don't agree a standstill until you understand the financial condition of the borrower and its projected ability to repay.  If the same due diligence were exercised at the inception of a loan, banks would be exposed to fewer reschedulings - especially if this were accompanied by thinking hard about the purpose of the loans and whether they make economic sense.
5. The fact that DW and its creditors are in frequent dialogue is a sign that talks haven't broken down.  That is good.  But what are the two sides talking about?  If the press accounts are correct, they're not talking about any concrete proposals for a rescheduling.  And apparently not about a standstill.  It's very easy to have friendly discussions when you're really not talking about anything difficult.
6. So that seems to belie impressions of "great co-operation".   Perhaps, the lack of sharp disagreement and the appearance of great co-operation are related to that fact  that there is nothing contentious on the table.  So I don't understand how DW can reasonably draw the conclusion that they will be able to conclude a rescheduling termsheet by the end of April. 
7. Bankers are objecting to signing a standstill because DFSF is requiring its loans have priority over theirs.  Perfectly understandable.  If I were a creditor, I would.  The central issue  is the status of DFSF's loans. Not whether there is a standstill or not.  As I understand it, DFSF have and are making loans to fund DW's interest payments and operating expenses.  If so, presumably they are requiring priority.  So not asking for a standstill doesn't solve the fundamental problem.  From the banks' perspective the problem is solved if DFSF's loans are not senior to their own.   No doubt the banks would like them to be junior on the theory that DFSF is in effect "the shareholder" and its loans are protecting its equity. So unless either of these has occurred the problem has not been solved.  It is merely being ignored.  And will raise its ugly head when the rescheduling proposal is presented. Sorting this out will delay reaching a deal quickly.  Does this mean that the banks won't finally accept DFSF's priority?  No.  But one expects that if they cave, it won't be at the first request.  Or the second.  
8. I'm not sure the DIFC is a trump card.  Or frankly for that matter that DW need one.  The Investment Dar spent over a year negotiating with its banks without recourse to the DIFC Court.  Global Investment House roughly 12 months from default to signing.  So I'd discount this statement pretty heavily.  It's hard to see - as Lord Peter apparently does - "time running out".  What precisely do the banks do if the negotiations drag on? Have the BBA write a letter?  Ask Deputy Neal to scold Shaykh Mohammed? Hold their breath till they turn blue?  Go to the DIFC and ask to have the companies liquidated?  A court ordered liquidation would probably destroy significant value.  The fact that Lord Peter and Deputy Neal are "applying pressure" shows that the banks can't.