Dubai World To Offer 60% On Debt?

 

Business Maktoob reports that Dubai World is considering two rescheduling proposals:

1. 60% of principal over 7 years with no interest but with a sovereign guarantee from the Emirate of Dubai.
2. 100% of principal over 7 years:  60% apparently in cash and the rest in Nakheel assets with no government guarantee.  It is unclear if this offer also is without interest. 

Some reactions.

The substantial haircut in the first offer is actually larger than it seems.  Assuming equal annual principal payments and an annual 5% discount rate, on a present value basis the "generous" 60% turns out to be something more like 49.6% of face value. Loading repayments towards the back end of the maturity schedule or increasing the discount rate obviously reduces the net present value of the debt. For example, increasing the discount rate to 10%, leads to a 41.7% recovery - again on a NPV basis.  And it's probably a safe bet that the principal repayments will be back ended.  So let's say an effective 40% recovery is probably a good working assumption.

In the second proposal the banks are offered Nahkeel assets in settlement.  Presumably, these are assets that Nakheel believes it cannot realize during the next seven years at a  reasonable price.  Otherwise, it would hang on to them.  So, of course, it makes eminent sense to let the banks have a go.  After all, they've already demonstrated quite a high level of competence in selecting investments.  And a track record of financing them. Seriously, the only reason the banks would rationally consider taking these assets is if they want to pretend that they're not taking the haircut.  That will assume that someone will be willing to put a cosmetic value on the assets for financial statement purposes.

So here's how I see this working out to everyone's benefit.  There's that big piece of  undeveloped land on the seacoast which if I'm not mistaken serves as "security" under one of Nakkheel's "Islamic" financings.  It's an ideal spot for a new addition to the wonders of Dubai Land.  

Like Dubai World I have two proposals:

1. "Bankers' and Investors' Folly City".   A multi-billion dollar city devoted to Great Moments in Investing and Financing.  I know just the guy in Bahrain to flesh out the concept.   I see a recreation of the Chunnel,  a replica of Enron's Headquarters,  SubPrime Acres, etc.  And rides too, the Bernie Madoff  Rollercoaster,  The Dot Com Boom,  The Implicit Guarantee.   All life size. This is after all Dubai.  It's good this is a very large piece of land because there are many many more great moments in banking to choose from.  
2. Or perhaps a Burj al Balaaha (برج البلاهة) twice as tall as the BK.  Each floor designed around a financial disaster theme.  But with the observation deck in the basement.  When one has the right sort of vision, one doesn't need to be on the 124th Floor to see the glorious horizon.

On a more serious note.  It's unclear if these two proposals are really serious or are merely the opening positions in what will be prolonged negotiations.  Positions designed to "frame" the debate.  Scare the banks with an effective 50%  to 60% haircut (present value basis).  Then when they settle on a 30% haircut they will feel they've gotten a great deal.  And no doubt brag about how clever they were in negotiations with the borrower. 

In any case, with this sort of opening bid, I expect that negotiations are going to be prolonged.  This may explain in part the delay in the standstill request.

Finally, at recovery levels like these the banks should seriously consider putting the two subsidiaries into liquidation and taking ownership.  With a bit of luck and some patience, there should be a good chance of a much higher recovery.   After all  if you're willing to wait 7 years for 50%  (or less) of your money, why not stretch it out to 10 or 14 years and get back much more?  Also the threat of taking over the assets could be quite salutary in getting the owner to rethink his offer.