Dubai World to Submit Standstill Request During February

 

 

According to an article in today's Al-Ittihad Newspaper quoting an unnamed lender, DW will submit a formal standstill request this month.

The article states that DW has spent the period since its 21 December meeting convincing its lenders that its assets were good and that prospects for a successful restructuring were high.  

However, it's really hard to buy this.  I can't imagine why lenders would not agree to a standstill:

1. If they think there is no hope for a successful restructuring, wouldn't the wise thing be to take the DFSF money and pull the trigger later?  At least they will get the interim cash flow. 
2. If they're not sure, take the DFSF money and spend the next six months doing the most rigorous of due diligence.   And make a decision then with a bit of cash in one's pocket.
3. If they procrastinate in coming to a decision, there is a danger that the cash flow will dry up - unless the Government changes its mind about continuing to pay (often negotiating positions are just that) or there is a miracle in DW's operations (miracles do happen but sadly not often enough to be a reliable credible second way out).
4. Another highly motivating factor is that more than just a few of the lenders have very significant sums at stake.  Thus, a good number of creditors have a very strong incentive to "extend and pretend" regardless of whether the rescheduling has a low, medium or high probability of success.

So, what could account for resistance to a standstill?  

1. A group of lenders determined to make such a nuisance of themselves that they get taken out - maybe by those larger banks with so very much more at stake.  
2. Stupidity and or incompetence (a sadly not uncommon occurrence).
3. Failure to submit a standstill for other reasons.  And that could be a "client" issue rather than a Aidan issue.  That is, he is giving advice but the decision process is stalled.
4. Other issues.

On that last topic, you'll recall that another reason has been given for the delay in submitting the request:  negotiations over the terms on which the Dubai Financial Stability Fund would provide funding to DW to enable it to continue operations and to pay interest.  Press reports suggested that the DFSF was looking for collateral.  Since lenders are only being paid interest what that would mean is that the lenders would be effectively "mortgaging" their future principal repayments to get interest now.  On an economic basis cash inflow is cash whatever one calls it.  However, on an accounting or regulatory basis there could be consequences.  I'd have to vote for this as being the impediment.

Business Maktoob has an article today based largely on the Al-Ittihad article which offers another explanation, though I don't find this in Al-Ittihad:

"It's difficult to coordinate an agreement with so many banks...the process has been slow," said one Dubai-based banker, who asked not to be identified.

It's not uncommon that there are many creditors in reschedulings.  That's why  lenders form a steering or creditors committee to facilitate communication and negotiations.  On that latter point the rescheduling process is a "negotiation" as opposed to a "dictation".   One side proposes something.  The other side may not immediately accept it.  And then a solution - often but not always a compromise - is worked out. 

Professional advisors in the business understand that there is a particular psychology involved in restructurings and that reaching a deal requires accommodating oneself to this dynamic.  Looking at it from the  borrower's advisor's point of view, the first step is getting the client to realize that he has gone from hero to zero notwithstanding the  earlier creditor talk of a "relationship'".  That creditors now aggrieved are likely to want revenge for the borrower's "faithlessness".   The wise borrower then makes a sacrifice or two.   Often the first step is a bit of blood in the form of sacking someone in management: throw a handy virgin or senior manager into  the volcano.   Undertake some perhaps needless  but symbolic cost cutting (which is completely irrelevant to the prospects for recovery) so that creditors can see one is not only contrite but also suffering as they themselves suffer.  Another way is to give  some tactical victories to the other side during negotiations.  Propose more than one wants so that the lenders can reject it and score a victory.  Later around the syndicate campfire the bankers can tell stories of their bravery and cunning and how they faced down the borrower and forced him to bend to the inexorable wills.  And conveniently forget the original underwriting decision that got them into this fix.

Let's say one wants a six month standstill.  The banks may not wish to go that long.  One proposes a six month period knowing this.  The banks balk offering only three.  One then reluctantly proposes a three month standstill that is renewable for a further three months crying at how cruel and unreasonable the banks are being.  Sensing blood in the water, the banks pounce.   One has one's six month standstill or close enough so that one has gotten what one wants.