The National: "Dubai to Take a Hit on Debt Exposure"

Frank Kane over at The National newspaper in Abu Dhabi with an update on developments in the  Dubai World restructuring saga.   

The title carries a pretty strong implication that there will not be 100% recovery for the lenders.  Not from the assets of Nakheel and other subsidiaries to be restructured.  Nor from the Shaykh up the road in Abu Dhabi.   And certainly not from his less rich brother in Dubai. 

It sounds like the intent is to offer several restructuring options.  Another sign of less than a full recovery.  No doubt with the tenor of each and certainty of repayment inversely related to the offered recovery amount. 

That's coupled with the news that the DFSF will after all not require that its loans have priority over other lenders'.  As you'll recall that's been a sticking point with lenders.  Having DFSF ahead of them in priority of repayment would make the haircut even larger.  It's unclear to me why this was ever raised in the first place.  Didn't DW realize this would provoke howls of outrage from the lenders?  What were they thinking?  

Or was the strategy to create a controversy to distract the banks?

The step by the DFSF is a way of making the pain of the banks a bit more palatable.  And the retreat could be tactical.  Give the banks a victory on this issue.  Then hit them with the haircut, noting that the DFSF was also subject to it.

One can look at any potential "hit" to DFSF from several perspectives.

Of course, if the DFSF is pari passu with other creditors then it will be subject to the same menu of restructuring options.  One would expect that the DFSF will be willing to take the longer tranches and be more patient with ultimate recovery, including losses.  As a governmental entity,  it will not face the same constraints that commercially oriented lenders will face with regulatory authorities' capital requirements, Basel II, the strictures of IFRS, shareholders, etc.  So it's pain on these scores will be less.  And unlike the lenders who made a bone-headed underwriting decision, the Fund stepped in to save the day so its losses are calculated and done for the "greater good".

The total "hit" taken by lenders can be assumed to be an economic benefit to Dubai - money it would not have to pay to the lenders to make up for any shortfall in assets.  Say the DFSF provides $10 billion to the restructured companies bringing total restructured debt to $32 million.  If there is a 30%  haircut, its gain is 2/3 of the 30% .  That of course ignores the losses that will be felt in the local banks in which it has an ownership interest.  

On the other hand wise and brave lenders out there should be applying any cashflow from the companies against principal.   Those banks from jurisdictions that levy income taxes and allow provisions and write-offs as expenses will also get an offsetting benefit courtesy of the tax payers in those jurisdictions - assuming of course that they actually pay enough taxes.  And where jurisdictions don't allow provisions/write offs as an expense, then reducing interest income (by applying payments to principal) could be a way of generating an expense for tax purposes.

Another bit of news is that DW's expectations now appear to be to reach a comprehensive deal in a couple of months to four months.  My guess is that it will be the latter.  If the restructuring menu has several options, that will be more working parts for the banks to negotiate over.  And then of course more choices to be made with consequent time required to evaluate each.  

The Central Bank of the UAE and Abu Dhabi are being "kept part of the dialogue, like many other constituent parts of the UAE. When the time comes for a proposal, nothing in it will be a surprise to Abu Dhabi."  Which implies of course that in the past they were surprised perhaps unpleasantly by the goings on in the Emirate "down the road from them" with its debt management or perhaps more appropriately mis-management.

Finally, many of the themes sounded by the "government" source in the article are from the script recently recited by the Lord, the Deputy, the IMF, and the Financial Times.  Transparency, fairness, equal treatment, etc.  I guess the bully pulpit can have an effect.