Dubai World Debt Rescheduling Proposal: US$9.5 Bn Govt Cash & "100%" Repayment

DW has finally released its debt restructuring proposal.  The creditors have the details.  We have  somewhat less in the form of press releases and media commentary.

Here is the WAM press release.  And  Nakheel's announcement.  Here are accounts from  The National and Gulf News.

At this point, several key questions are unanswered.   Is there a margin on the financial creditors' debt?  What is the tenor of the maturity pushout? What are the principal and interest repayment terms?  

So what follows is a preliminary assessment.

Certainly, at first glance this looks less onerous that some of the earlier proposals which  were floating around in the media.  But in part that may have been the plan. Often creditors "float" harsh plans which are designed to frame the expectation of creditors.  Then the desired "final offer" can look quite good.   Also  a well timed leak or two is a way to informally test creditor and market reaction.  There's plausible deniability if the market reacts negatively, because a formal offer wasn't made.   And sometimes such reports are result from misinformed sources.

No doubt there was some of the former at play, though I suspect that the final offer was shaped by outside pressure.  Plenty has been applied particularly from the UK.  And so I suspect Dubai was "moved' off its  own plan to something more favorable to creditors.    

The first dramatic headline is about support from the Emirate - contrary to its earlier assertion that these were commercial companies and lenders had to look to the companies themselves for repayment.

Government of Dubai Support:  US$9.5 Billion in New Cash and US$10.1 Billion Debt to Equity Conversion  

1. Three introductory comments before we get into the details about DW and Nakheel.  
2. First, the funds are being sourced US$5.7 billion from those committed to by Abu Dhabi and US$3.8 billion from the Government of Dubai.  The Abu Dhabi portion is coming from the undrawn amounts on its earlier commitment.
3. Does this mean a wavering of support by Abu Dhabi for the restructuring?  After all it's not pledging new money.  I don't think so. In November when Abu Dhabi made its commitment, it did not disburse all the funds at once.  At that time I posted that it appeared Dubai had to justify future drawdowns to Abu Dhabi before the latter would fund.   If that interpretation is correct, then Abu Dhabi is committed to the rescheduling with roughly 60% of the new cash outlay.  Equally the Government of Dubai is putting significant new cash on the table now.  And,  unless Abu Dhabi forgives its previous loans, Dubai is obligated to repay Abu Dhabi for its financing, including this amount.
4. Second, the debt to equity conversion benefits creditors in two ways: cashflow preservation and balance sheet protection.  It reduces the debtor's cash outflow for interest and  principal, leaving more funds for the non governmental creditors.  It also provides an additional legal buffer  to absorb any decline in value of assets or investments held by the companies.
5. Third, given DW's past tendency to employ fuzzy math in its press releases, some of you out there might wonder if some of the numbers being bandied around this time are rock solid.  For example, does the equity conversion  of US$8.9 billion (mentioned in the WAM release) at the DW level also include the US$1.2 billion mentioned later with reference to Nakheel?  Or might  Dubai Inc inadvertently double counted again?  For this analysis, I've  assumed it is not.  That with Aidan in charge things are a bit more professional these days.      

Dubai World

1. New cash US$1.5 billion.
2. Conversion of existing US$8.9 billion of debt to equity.

Nakheel

1. US$8 billion for Nakheel 
2. The cash at Nakheel will be used to fund operations and settle certain liabilities.
3. While support is contingent upon reaching agreement with creditors, US$1.5 billion of the cash will be made available immediately to fund contractors building near term projects. More on that topic below.
4. Conversion of US$1.2 billion of government debt to equity.

Nakheel Debt Restructuring Proposal

Projects

1. It may seem a bit strange that Nakheel's press release on its restructuring gives emphasis to its projects by mentioning them first.  Why don't they lead with the proposal we're all interested in?  What happens to the creditors?  Good question.
2. Looking at Nakheel's 30 June 2009 financials, we get the answer.  Property Under Construction is some 77% of total assets.  Realization of this value is key to two things.  Nakheel's ability to pay its creditors.  Preservation of Nakheel as an ongoing business.  On the latter point, this is a restructuring not a liquidation.  Or at least that's what we're being told now.  Also the company already owes the contractors and suppliers for the work done to date.  Abandoning a  half finished project is a dead cash drag especially given the advance payments received from purchasers which would have to be refunded.  Completing as many projects as possible is therefore warranted as long as they don't result in a large cash loss.
3. Another good reason for this is on the liability side of the balance sheet.  Those AED27.9 billion (US$7.6 billion) in Advances represent client prepayments for purchases.  If the property isn't handed over, Nakheel owes the money back.  If clients lose hope that their villa is going to be built. they may walk away and stop paying their remaining commitments.  Nakheel then needs to replace that funding.  And if enough walk away a project may be uneconomical.  So it's a question of leverage.  Spend a dollar and save having to refund two or more.  Spend a dollar today and complete the project and get some additional cash.  Net net then the company is better off.  So then are its lenders.
4. The focus as you'd expect is on the near term projects.  Those projects further out are not of immediate concern in preventing a cash outflow.
5. And there is another reason to keep working:  the economy.  Continuation of these projects provides support for the entire economy in a period of stress.  The sudden stop of the property merry-go-round in Dubai is going to have some rather serious economic effects.  Better to mute them as much as possible.  And if Nakheel were to stop work, existing clients might decide to throw in the towel on their commitments.  Certainly, new clients would be hard to attract.

Offer to Clients 

1. As outlined above, complete the near term projects and give those clients updates on new completion dates.  The idea of the latter is probably to keep them "on the ranch" and reasonably quiet.  New handover dates will eliminate uncertainty.  A client might not like being pushed out but at least he's got a better idea of when his property will be ready.
2. Clients with projects further out are given options.  They can take a credit for what they've paid and  transfer it to a closer-in project.   A smart move.  This enables Nakheel to fill out those near term projects by shifting demand.  And, of course, if enough clients apply their existing payments to current projects, one can postpone, shrink or cancel future projects - as a response to "market demand" not its own financial condition.  If you're a client, do you wait for five more years for your project to be finished?  Or do you grab something being finished in the next 12 months? 
3. For those who don't want to wait or transfer, they can get their cash without interest after five years.  This is structured to give clients an incentive to either wait or take the transferable credit.  Assume that 5% is a fair rate for waiting.  This payment scheme results in a 22% discount.  Apply a 10% rate and you get a 38% discount.  Powerful incentives to take the alternative offers.

Offer to Trade Creditors and Suppliers

1. We still haven't gotten to the financial creditors yet.  Why?  Nahkeel needs these parties to continue its operations so they're mentioned next.  And showing that it is going to continue operations should have a positive effect on clients' belief that there purchases will actually be built and handed over.
2. What's on offer?  40% cash (based on agreed claims) and 60% (on estimated claims) in a publicly tradeable security at a "commercial interest rate".  Each creditor to receive up to an immediate AED500,000 cash payment or its full receivable.  Apparently, by number some 50% of contractors have amounts equal or less than this amount.  This will help out a lot of small businesses less able to cope with the terms being proposed.  Presumably, most or all of them are local companies - so another shot in the arm for the local economy.  And hopefully a way to prevent tipping these companies into distress and affecting local banks.
3. Let's dissect this a bit.  
4. Note the cash payment is on agreed claims.  If you look at Nakheel's 31 December 2008 financials, you'll see that there were some AED10.4 billion out of the AED28.6 billion in Accounts Payable and Accruals that represent billed but not yet agreed/certified claims.  While that was one year ago and there's been plenty of time to certify those claims, there is probably a significant amount of yet not agreed claims.  And some from 2009 work.  So the initial cash outlay has been muted.
5. 60% of estimated claims will be paid via a tradeable security.  Since it's tradeable, a contractor or supplier can cash out.  Of course, being tradeable does not guarantee there will be a market.  Or the price in that market, i.e., discount if any.  It does, however, make the transfer of a clear title (presumably unencumbered by any warranties for the services performed) a lot easier.  
6. The company is giving the contractor the benefit of the doubt that its yet unagreed claims will prove to be valid.   What's not clear is what happens with the unagreed claims on the cash payment.  If these are later accepted, I'm guessing that they become a new receivable from Nakheel.
7. It's also unclear what the term "commercial" interest rate means.   Does this mean a market rate of interest?  Or does it mean the sort of incentive terms that a contractor might give - which could include an element of discount from market rates?

Financial Creditors

1. Sukuk Holders get a preferential repayment:  100% of principal and periodic distribution/profit amounts ("interest") on scheduled maturity dates.  Two Sukuks.  Sukuk III AED 3.6 billion (US$981 million) due 13 May 2010.  Sukuk II US$750 million due 16 January 2011.  Presumably, being paid because it's thought too hard to get acceptance of any restructuring.  This may reflect the company's analysis of holders and which ones are likely to be hostile.  Looks like a victory for HF and distressed investors.  This is the best deal for financial creditors.
2. Secured creditors also to receive 100% of their principal and accrued interest.  And to keep their security.  Nothing remarkable here.  That's why lenders get security and register it to have priority over those who didn't.  Once they get it, they don't easily give it up - until they're repaid.  Unclear about the interest.  Does this mean at Libor/Eibor flat?  Or do the old margins stay intact? Is there a new margin?  I'm guessing (but note that word) there's no margin.  Existing facilities will be maintained and just extended or rolled over.  Two key points not disclosed:  What is the new maturity? And what are the terms of repayment of principal and interest?  These will determine the extent of the discount.  Some earlier musings on discounts via interest rate reductions.
3. Unsecured creditors a similar deal with respect to 100% receipt of principal and accrued interest/profit margin.  Note all such facilities will be rolled over into a new debt facility.  Since the structure is Ijara, I think this is necessary to keep Shari'ah boards happy that the facility  remains "Islamic".