The National reports that Dubai World's standstill request is being delayed because the Dubai Financial Support Fund ("DFSF") is insisting that it take collateral for the money it advances to DW. Not unexpectedly, the existing lenders are concerned that under this approach their position will be eroded as the DFSF steps in front of them in terms of priority in a liquidation. They probably also find the idea of allowing DFSF to take collateral objectionable because they view it as a "shareholder" in DW since both belong to the Emirate.
Complicating matters is the fact that DW has been preferring certain creditors over others. For example, the holders of the Nakheel bond received 100% of the principal and interest due them on the maturity date - a not inconsiderable US$4billion+. A large part of the US$6.2 billion in DFSF funding referred to in the article. Other creditors are likely not to be so lucky - certainly with respect to time and perhaps with respect to the amount ultimately recovered.
On the other hand, the DFSF is arguing that it has to put funds into DW on a commercially reasonable basis.
While this dispute may be occupying the banks and DW now, I think there is a more fundamental issue at hand. So far no one has raised it. So let me break the silence.
If DW needs external cash infusions to enable it to pay interest, its current financial situation is very weak. Its operations aren't generating enough cash to pay the interest on its loans plus other operating expenses. The proposed standstill is six months. Does anyone out there believe that in six months these two companies operating cashflow is going to dramatically increase? Does anyone out there anticipate that the market for assets is going to improve to the extent that DW will be able to dispose of assets at good prices?
Or is the plan that the DFSF is going to keep paying the interest? And perhaps taking collateral? But then how does the principal get repaid?
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