You Said What?: Europe Can Learn Debt Management from Dubai

The following was reported in The National on 26 May.

European countries grappling with Greece’s financial crisis could learn from Dubai’s handling of its own debt problems, Sultan Ahmed bin Sulayem, the chairman of Dubai World, said yesterday.

The Dubai Government had intervened positively to provide a solution to the emirate’s debt problems and ensure no banks were in financial danger, Mr bin Sulayem said.

Dubai’s response to the financial crisis “should be adapted and learnt by the European countries in facing and tackling the crisis in Greece”, he said during a speech in Dubai yesterday.

From the Gulf News 27 May: "DIC Seeks Three-Month Repayment Delay".

"It is not a standstill. It is a request for extension of maturity,"  "The extension period would allow the implementation of a consensual longer term plan that would enable DIC to maximise the value of its business for the benefit of all its stakeholders,"

From the Financial Times 9 May:  Dubai Holding Advisers Engaged".

From Trade Arabia 26 May:  Dubai Holding Debt Restructuring "Risk Mounts"

"Dubai Holding is seen as the next subject of the emirate's debt restructuring programme which started with Dubai World in November, Saud Masud, head of research for the Middle East and North Africa at bank UBS, said in an interview.
'We believe Dubai Holding has roughly $15 billion in loans and bonds but this does not include any off balance liabilities arising from investor or end-user default on properties that have dramatically declined in 18 months,' Masud said."

From the Financial Times 27 May, Simeon Kerr reporting.

"Government cash flows remain meagre and analysts worry about its ability to raise more debt in the current environment. The banking system remains tight and in need of more liquidity to finance businesses and real estate projects.

UBS, for example, has said Dubai developers may need to raise another $11bn to finish semi-complete the real estate projects that haunt the city.

More hard work is necessary for Dubai to turn the corner."

If you decided to swim the Channel and had to be pulled out by the scruff of your neck in order to save your life, it's probably not a good idea to boast about your aquatic and athletic prowess.  If other members of your family are still flailing around in the water, it's probably an even better idea to avoid making similar comments about your family's skills.

Dubai World - Debt Rescheduling Deal Headline Terms Agreed In Principle

The press has been positively atwitter with news that Dubai World has struck a deal with its creditors.  

Even the normally circumspect The National is excited.  "Dubai World clinches US$23.5bn debt deal" trumpets its business page,  though it does note that: 

"The deal has been clinched with the seven members of the co-ordinating committee representing 60 per cent of Dubai World’s total bank lending over the “headline economic terms” of the restructuring proposals announced in March."

So what we have in effect is an agreement in principle with the creditors' committee on the very big picture terms - not on all the details.  A "bit" more work to do.  Presumably, the plan is to sell the basic plot line to the other creditors and then negotiate the details.

I haven't seen the structure outlined in the press - but I may have missed an article or two.

But we can turn to the press release  DW issued today.   Curiously, their press release has the more sober headline "Dubai World Agrees Headline Economic Terms in Principle with Coordinating Committee". 

The debt will be divided into two tranches:

1. Tranche A:  US$4.4 billion.
2. Tranche B:  US$10.0 billion with three options. 
3. Detailed repayment schedules are not specified.
4. Nor are interest rate margins.
5. Nor is the nature of the shortfall guarantee - normal option or enhanced option.
6. Each lender will receive a pro-rata share in Tranches A and B - with his choice of options in Tranche B. 

Tranche A

1. Final maturity five years.

 Tranche B.

1. Final maturity eight years.
2. Options 1 and 2 are available to US dollar lenders.  
3. Options 1, 2 and 3 to lenders in AED.
4. Option 1- The Increased Shortfall Guarantee Option - Lenders in Tranche B #1 will benefit from  an increased shortfall guarantee if the borrower cannot refinance or repay at maturity.
5. Option 2 - The Higher Interest Rate Option - Lenders in this tranche forgo the  increased government shortfall guarantee but get an unspecified "PIK" (payment in kind) interest.  As I understand this, it means that interest will be capitalized and paid at maturity.   Thus, on a present value basis, the nominal interest rate is higher than the effective yield.  They apparently get to "keep" the standard shortfall guarantee.
6. Option 3 - An Even Higher Interest Rate Option - Lenders with facilities in AED  may forgo the entire shortfall guarantee (both standard and increased) but get a higher cash payment and PIK coupon.

It seems that DW is being sensitive to the needs of its creditors.  

Without specific details - many of which appear still being worked out -, I'm reserving comment for now.  The major issue will be the haircut even if as some journalists have noted it is no longer being referred to.  As mentioned earlier, most visible will be the IFRS accounting mandated haircut as any negative interest margin is going to be buried in the aggregate interest revenue and expense numbers of the individual banks.  While it be nonetheless real, it will be invisible.  And therefore to a good banker won't exist. 

That being said even at this stage there is one key comment that can be made:  a stock market tip.  

Look carefully at the names of the banks in the Creditors' Co-Ordinating Committee - they are responsible for 60% of the US$23.5 billion.  You now have a powerful insight into their original credit underwriting process.  And apparently their risk retention policies. Normally, you'd have to pay a lot of money to get  inside information like this.  Luckily, the banks have decided to defray the cost. so you don't have to . Adjust your portfolios accordingly.  Banks with weak credit underwriting skills and processes are likely to make the same mistakes over and over again.  "Sophisticated" lenders who believe in the Tooth Fairy and the Implicit Guarantee are just as likely to believe in some other mythical financial creature. 

Competition: Revise That Corporate Slogan

Taking a cue from a post from Farmer Joe, Suq Al Mal launches its First Annual "Revise That Corporate Slogan" Competition.

Entrants may submit their entries by posting a comment.

And may, if they wish, suggest other firms whose slogans may need updating or revision.

Here are our two initial candidates: 

1. Dubai Holdings - For the good of tomorrow.
2. Dubai World - The Sun Never Sets on Dubai World

 

Dubai World Restructuring - Signing in Two Weeks

AlQabas carries an account of an interview by Shaykh Ahmad Bin Saeed Al Maktoum, Head of the  Supreme Committee for Fiscal Policy of the Emirate of Dubai with CNN Middle East Markets.

He's quoted as saying that the process has reached the final stages and he expects that the restructuring will be signed in a couple of weeks.

What's perhaps more important are his comments that Dubai learned from the financial crisis the necessity of focusing/concentrating on the sectors which constitute the core/backbone of its economy.  The article states that he did not mention the real estate sector.  He reportedly called on workers to revisit their plans confirming that the previous real estate boom will not return just at the revival in real estate will not begin again before some years.

On the rescheduling he said the proposal ( قُب.ل   Not sure what this means.  Cable?  Anyone out there with an idea please post.) is in its initial forms and we are putting the finishing touches on it. today  We're optimistic in getting all signatures with the hope this will be completed in the next two weeks.

About the complaints of local creditors about the interest rate they will get is unfair to them compared to what the Western creditors are getting, an unnamed Emirati official is quoted as saying:  "The offer of Dubai World is generous for all.  And we have made it clear that we do not want to harm any of our creditors.  The creditors in turn understand what we are doing.  And it's incumbent on them to thing about their long term presence (in Dubai)."

DIFC Investments Reports US$562.1 Million Loss

The National carries an article today about DIFC Investments loss.  

Beyond the details, this is another sign that the economic distress in the Emirate is not limited to Nakheel and Dubai World. 

Rather the impact from the crisis is broad.  With new funding constrained, the Emirate  is now in a very difficult position.  It simply cannot devote all of its limited cash to triage. - salvaging those bits with the most commercial promise. Substantial funds have to be devoted to paying Nahkeel's creditors to prevent a complete implosion of the economy.  And to be clear, I'm not focused so much on banks and other financial creditors as much as on trade creditors and investors/purchasers in the projects.

New Graft Case at Nakheel

As reported by the Khaleej Times.  Some rather expensive non existent pens.

Dubai World Rescheduling - Nakheel Trade Creditors Offered 10% on Settlement Bonds

There's been some commentary on the princely interest rate that Nakheel was reported to be offering its trade creditors - 10% - compared to the much smaller 1% to financial creditors.

This article from Maktoob Business outlines the rationale. 

It's all a matter of devoting resources to those parties that benefit the company and the national economy the most.

Simply put there is more bang for the buck locally in paying our trade creditors.

Something discussed in an earlier post here.

Dubai World Restructuring – Why Interest Rates Matter

You may have seen the news reports that DW and its creditors were haggling over the interest rate on the rescheduling.  DW reportedly having offered 1%.  And its creditors (or some of them) insisting on 5%. From the context it seems that this is a fixed rate and not a margin over a benchmark like Libor. I can't imagine that Reuters would confuse "margin" with "rate".

Of course, both parties are negotiating so it's probably safe to bet that neither side is expecting to get what it is asking for.

What do these levels mean in terms of a haircut? What's the appropriate discount rate to use for a net present value calculation?

Let's turn to the second question first.

There are two discount rates we can use. 

The creditors' proposed rate of 5%.  This rate is most likely designed to minimize/eliminate the haircut that will arise from an IAS #39 impairment test due to the new rate being lower than the contractual rate.  (Recall the assumption is that lenders are carrying their DW exposure at historical cost.  If they're not, then IAS mandates they discount estimated cashflows based on a market rate.  Also we're making a critical assumption here that the banks are estimating they will receive all their original principal back plus interset).  Why this focus on an accounting haircut as opposed to looking an economic value?  Banks will be most concerned about accounting losses as these are the most visible. 

How do we estimate the economic (real) haircut?  We can use a recent market rate. DEWA just raised a US$1 billion five-year bond at 8.5%.  Some caveats.  It's important to note it's highly likely that the DEWA bond was deliberately priced above market. Why? First of all, Dubai cannot afford to have a major transaction fail in the market. So the bond has to be priced to ensure success. Second, the issue was reportedly 11x oversubscribed. That in itself is a pretty good indication that the price could have been tighter. Of course, Dubai would not only like the deal succeed but also to have a very strong display of market appetite for its paper for this highly visible post crisis issue.  So another reason to overprice.  While the rate might not necessarily be the right market rate for DEWA credit,  the Dubai World rescheduling is not a BBB- credit like DEWA. So we can argue that 8.5%  is probably a more reflective market rate than the 5% rate and thus a better measure of economic loss.

It's important to note that neither rate is completely accurate.  But we're not after what is fundamentally elusive precision here as much as we are interested in a directional measure of the haircut.

Now that we have our discount rates, we need cashflow scenarios.

The actual proposed cashflows on the rescheduling aren't known so we'll use two proxy "worst" and "best" cases to set bounds - much as we did with the interest rates.

First, a bullet repayment at the end of the repayment term with interest at 1% being paid annually. This represents our worst case from a calculation of discount.   While this would be the ideal debt restructuring from DW's perspective, it's highly unlikely this could be sold to creditors.

Second, equal amortization of principal with interest at 1% being paid annually. This represents our best case. The ideal case from the lenders' perspective (absent of course an even better case of a generous neighboring Shaykh paying off the entire debt today).  But not very realistic and certainly not what DW would want.  It is highly likely that restructuring principal amortization will be back ended as is typical in debt restructurings. 

And finally to conform to the details of the restructuring – we'll model a 5 year and 8 year tranche.

To summarize, these two scenarios give us a reasonable approximation of the best and worst discounts. Results are rounded to the nearest percentage. The discount can be figured by subtracting the NPVs shown below from 100%.

Bullet Principal Repayment 1% Interest Rate Paid Annually in Arrears

Discount Rate	5 Years	8 Years
5%	83%	74%
8.5%	70%	58%

Equal Principal Amortizations 1% Interest Rate Paid Annually in Arrears

Discount Rate	5 Years	8 Years
5%	89%	85%
8.5%	81%	74%

On the 5 year tenor, the banks are trying to avoid an accounting "haircut" of between 11 and 17%. And on the 8 year tranche between 15% and 26%. 

From an economic perspective the haircut is even more 19% to 30% on the 5 years and 26% to 42% on the 8 years. As stated above, the banks are going to be more concerned about the visible accounting haircut. 

These are fairly crude approximations - the compound effect of uncertain cashflow patterns and inexact discount rates - but they give an idea of what is at stake here.

Limitless - First DIFC Case

Here's a report from Maktoob Business that a former employee has filed a case against Limitless at the DIFC Courts.

As you'll recall (and if you don't, here's the link), if a company owes US$2,000 and does not pay for a period of three weeks, it may be wound up.   Chapter 5 Articles 50 and 51 are the place to look.

Presumably a tactic by the former employee to secure a payment.  It's highly unlikely the Court will put Limitless in compulsory liquidation.

Nakheel Property Holders Seek Legal Help

The National reports that some 700 investors in Palm Jebel Ali are unhappy with the alternatives presented under Dubai World's restructuring plan and may hire a law firm to act as advisor.  

They seem to be looking to secure the following:

1. A firm schedule for completion to ensure a quick handover
2. Assurance that quality and design standards won't be compromised to save project costs
3. Recalibration of future installments to actual construction progress.  The article goes on to say that on average investors have paid in about 30% of the total purchase price.

Personally, I'd be concerned about the effects on maintaining project and building  quality in a stop-start project, particularly if there is a constraint to keep the costs within the original pricing.  Unless of course costs have come down significantly from then.

As well, it would seem natural that given the economic downturn some of the non residential attractions on the island might be scaled back or eliminated. 

Think I might be inclined to take my credit to an existing or almost built project, especially if the credit was against current market value instead of "rack rate".

Perhaps, The Real Nick could weigh in with a comment.

"Dubai World Property Plan Not a Quick Fix" UBS

Copyright The Truth About

Creative Commons Attribution-Share Alike 2.0 Generic License

The National has an article with the above headline and this lead paragraph.

If you thought the troubles in Dubai’s property market would be cleared up overnight if Dubai World successfully restructured its debt, you may want to think again.

Wise words indeed.  

To which AA might add, that if you did, you might want to consider turning over your financial affairs to someone more reality based.  That being said, if you do execute a power of attorney, choose your "wakil" wisely. 

In which case the following word's from the Bahraini Newspaper AlBilad may offer some helpful guidance:   لا تدع زوج ابنتك يقود سيارة عائلتك

Dubai World Rescheduling - HSBC Supports the Proposal

The National quotes Stuart Gulliver, HSBC's Chairman for the Middle East and Europe as saying that HSBC would sign the proposed debt restructuring.

He also said that each bank knew the conditions applicable to the restructuring loans. 

Perhaps, the banks who claimed to be in the dark are being represented by the same officers who made the original loans.

Dubai World Rescheduling Proposal - Just What Did the IMF Say?

Several Gulf papers have carried headlines relaying what are described as supportive IMF comments on Dubai World's proposal.

Here The National says "IMF Says Dubai World's Debt Proposal Fair".

Here Gulf News says "IMF Back Dubai Debt Proposal".

In reading these headlines one might very well come away with the perception that the IMF had reviewed Dubai's rescheduling proposal and had given that proposal its imprimatur.  In effect recommending to the banks that they accept the proposal.

Is that what the IMF did?

I'm not sure that's the case.

We'll have to wait for the IMF to release its official statement. As of close Monday, I didn't find this on the IMF website.

Right now the only comprehensive quote I've seen is from the Gulf News (in the article cited above).

"Today's announcement by the Chairman of the Dubai Supreme Fiscal Committee for the restructuring of liabilities of Dubai World and Nakheel is a welcome step further in the debt restructuring process. We support the authorities intention to find a fair and equitable solution for all stakeholders," the IMF said in a statement issued on Thursday evening, a copy of which was obtained by Gulf News.

"A satisfactory conclusion of this process will pave the way for improving overall credit conditions, the investment climate, and economic activity in Dubai and the UAE in general.

"We encourage all parties to build on the momentum and work together in satisfactorily concluding Dubai World's debt restructuring."

What I see are the following:

1. IMF praise for the Emirate's intention to find a fair solution.  As I read this, the IMF is not saying that a fair solution has been found.  Or that the proposal just made is fair.  Equally, it is not saying that a fair solution has not. Nor that the proposal is not fair.   
2. The proposal is a step forward.  But the IMF does not say the end of the journey has been reached.
3. A call for the parties to work together to satisfactorily conclude DW's debt restructuring.  If it's a matter of the creditors' approving the fair solution, it's unclear what DW would have to do.  Wouldn't it just sit back and tally the acceptances?  Not much work in that. 
4. One might read the IMF statement to imply that the Emirate has made a positive step but that further negotiations on the details of the proposal are in order and both sides should work hard to craft a mutually acceptable deal. 

Dubai World Restructuring - Creditor Push Bank

Frank Kane and Asa Fitch have an article over at Abu Dhabi's The National "Dubai Government hits back at critics of $24.8bn debt plan".  

What I think is the interesting story within that story is that:

1. Apparently unsecured creditors are to receive their interest in pay-in-kind ("PIKs") which means instead of cash they get a note for the amount of interest. It appears the interest notes may be set to the final maturity of the loan. 
2. And, yes, if the unsecured lenders' interest rate is below market and then don't get paid until final maturity their discount is even bigger than just a below market interest rate.  As I've posted before IAS #39 is very very clear a restructured debt that carries an interest rate below the original interest rate gets marked down to the net present value of the estimated cash flow using the original rate on the unrestructured loan (if the asset were held at cost).    The estimated cash flow includes the timing of the receipt of the interest payments.
3. This raises an even more intriguing question about the principal repayment schedule.  If interest is being deferred in PIK securities, it would seem the company has a weak cashflow.  Logically, that would seem to imply that principal repayments might also be paid in PIKs as well.  I still haven't seen a detailed discussion of the amortization schedule.    
4. The unsecured creditors represent US$14.2 billion out of the US$24.8 billion in debt - or roughly 57%.  If they as a group are unhappy, DW has an issue.

What's also a bit puzzling is that with a seasoned chap like Aidan on DW's Team, there should be little surprise in Dubai that there is some criticism now.  The initial euphoria was based on a few big picture headlines - key details were missing from the announcement - the exact tenors, the interest rate, the repayment schedule.  Perhaps, what was interpreted as joy was just  relief that DW was not asking for an explicit "haircut".  But as always the devil is in the details.  As the details are released, there is bound to be some negative reaction.  And if there is still a lack of clarity in the details, then the situation is even more complicated.  It seems from this FT article that perhaps this is the case.

As well, since the Nakheel Sukuk holders are going to waltz home free - not troubled in the least by the rescheduling, only the most optimistic person could believe that this would not cause an objection or two.  While arguments may be made that this was necessary because it will be impossible to get the certificateholders to agree, regular lenders (especially those feeling potential cold winds against their unprotected backsides) have to be expected to protest.  

I posted long ago that despite wishes for a speedy conclusion that this process was going to take a while.   

The next stage is for DW to address concerns.  And perhaps tweak some terms.

The news about Dubai Holdings is going to complicate things particularly as DW's restructuring is dependent on a non inconsiderable cash infusion from the Emirate.  And having set a template with DW, the Emirate will find it difficult to negotiate a less favorable deal for Dubai Holding, if indeed a restructuring is in the cards there.

Dubai World Restructuring - Banks Need Details Before Deciding to Accept

Sometimes I think that newspapers and bankers have a soft spot for Suq Al Mal.  How else to explain this article from The National.

And in particular these absolutely "brilliant" 'quotes.

The bank creditors of Dubai World will seek further details on the US$23.5 billion (Dh86.31bn) debt restructuring plan before deciding whether to accept.

While the banks’ initial response has been positive, they will ask this week for greater clarity on certain points, such as the interest rates that will be paid to the creditors of the Dubai Government-controlled conglomerate.

There is certainly something to be said for checking the details.  As I've posted before, the more useful employment of that skill is during the decision process as to whether to grant the original or loan or not. If underwriting is properly done, one can avoid many - but not all - later "disappointments" with one's loan or investment.

“We are hoping to learn more details this week as we still don’t know exactly what the offer is on the table,” said a banker, who asked to remain anonymous.

 AA certainly hopes that this unnamed banker's hope becomes a reality before his bank makes a decision.

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". 

More on Omar Bin Sulaiman

Here's an update on Dr. Omar Bin Sulaiman by way of a press item from WAM, the Emirates Official News Agency.   

It seems the AED 50 million consists of bonuses he awarded himself for his performance while Governor of the DIFC.

What's highly interesting is the last sentence in the press release.

He also said a number of similar cases will soon be referred by the Public Prosecution to the court of justice.

Not because I'm particularly shocked that there was corruption but that it seems to be being pursued.   

In an article based on this press release, Gulf News comments:

A number of high-profile corruption cases have gone to court with the Dubai Court of Cassation handing irrevocable imprisonment and a fine of millions of dirhams to two former Nakheel executives.
The same court handed a similar jail term and fine of about Dh14 million to an Emirati former executive of Dubai Industrial City.
The Cassation Court will issue its ruling against five officials involved in the same graft case.
The Appeals Court and the Court of First Instance are looking into ten cases of corruption involving more than a dozen officials of companies such as Deyaar, Tamweel, Waterfront, Nakheel, Mizin and Dubai Islamic Bank.
Some have been sentenced and others are being questioned in court. Gulf News has learnt that Deyaar's former CEO could be facing a fifth case.

Dubai World Presents Restructuring Proposals

According to press reports, Wednesday afternoon Aidan Birkett presented Creditors' Committee with restructuring proposals, described as incredibly complex by one unnamed participant.

Here the accounts from The National Abu Dhabi and from Gulf News Dubai.

Once again we're hearing about fairly long tenors at low or below market interest rates.   It seems  pretty clear that some sort of haircut is going to be required.  The current negotiations are no doubt about how to limit it and how to disguise it as much as possible.  

Also there's a new "wrinkle" to the story the presence of Lady Shriti Vadera, an ex UK Minister who was involved in the drafting.

Interestingly The National says that the Government of Dubai invited her to help monitor the process, while the Gulf News, a Dubai newspaper, says the UK Government sent her because UK banks who are owed US$ 5 billion had raised "questions about the process to London".  One might have expected the GN to present this as a Dubai initiative. 

Four Nakheel Employees Under Investigation for Corruption

AlQabas reports that six individuals are under investigation for corruption - four employees of Nakheel and two from a private company over the payment of bribes.    Quoting "The Emirates Today", AlQ says that the investigation is preparatory to formal charges.

They are accused of demanding bribes and forging certain documents (unclear to me what these are) and then using them.  Perhaps, sale documents for properties.

The chief accused the former Head of Marketing for Nakheel is accused of having received AED 930,000 (note the article does not state the currency) according to investigations carried out by the Public Prosecutor during his imprisonment from last June to January.

According to the article this is the fourth corruption case at Nakheel.

With all the hot money sloshing around Dubai during the boom years, it's no surprise that there was corruption of this sort.   It would have happened in almost every other place in the world.

Dubai World - Nakheel - Wall St WTF Nails the Nakheel Collateral

Here's an interesting and humorous (unless you're a lender) post from Ken over at Wall St WTF.