Dubai World - Lenders Will Be Worse Off If They Reject Current Deal

Reuters reports in an exclusive that it has seen a document that DW has circulated to its creditors warning of the dire results if creditors reject the current deal.

1. No government guarantee
2. Loss of pari passu with the Dubai Fund.
3. Withdrawal of the generous offer to use previously ring fenced assets from Isthimar World and Infinity (MGM Grand in Las Vegas) to fund repayments.
4. Longer tenors.
5. Significant reduction in ultimate recovery.

As Reuters notes and quotes:

The document made clear that creditors would suffer in a liquidation scenario and that Dubai's own coffers would be protected.

"Recoveries for all creditors except DFSF in a liquidation scenario would be significantly below those expected under the proposal," the debt plan said.

Of course this announcement is completely unrelated to the fact that DW is trying to get creditor approval for its current plan which it "improved" once already because of creditor pressure.

Having been involved in similar such exercises,  AA can vouch that borrowers and/or bank steering committees never ever ever use dire threats to try and persuade other creditors to accept a plan.  No fear mongering.  No threats. You know stuff like:  This is the best deal you'll ever get.  Take it or leave it.  The alternative is destruction of value in a messy bankruptcy.  I'll hold my breath until my face turns blue.

And AA should know as he has been both a threatenee and a threatenor - though in an institutional and not a personal capacity.

Realistically at this point, DW is close enough to the magic number necessary to cram down creditors that it needs just a few more.  

You do remember how out of a solicitude for a fair and just process Shaykh Mohammed issued a special decree that DW's debt restructuring would be handled according to the DIFC regime.  And some said the Shaykh didn't have The Vision Thing.  As far as AA can see, he saw this coming all along.

And finally a virtual tip of AA's enormous tarboush to Aidan and DW.  It seems DW will sell "strategic assets" to fund repayments at least at some stage.  Note the use of the term "strategic" as opposed to "non core".

Dubai World Restructuring: Hard Slog to the Finish Line

Business Maktoob reports that Dubai World will meet with its creditors 22 July to make another presentation on the terms of the proposed restructuring.  And that subsequent workshops will be held in Hong Kong, London and Dubai to allow banks to pose questions on the restructuring to DW's expert advisors.

It's pretty clear that the sales process is still continuing.  

And from the number of "commercials" DW is either taking no chances on the outcome of the creditors' vote.  Or perhaps more likely has been encountering some resistance to the deal.  I say that because the 22 July meeting is at least three weeks behind the original schedule.  If smooth sailing were expected, the presentation would have taken place already.  And the creditors' deadline for a response would be running.   It's not. 

While ultimately a deal will be done (as the alternative is unthinkable), if a sufficient number of banks balk, there might be some improvement in terms.

Ownership and the "Joy" of Maintenance Fees

The National points up one of the issues of the strata or condominium form of ownership of real property.

One is at the mercy of one's neighbors.  If they fail to pay the maintenance fee, the upkeep of the building suffers from cosmetic to more substantial matters.    The market value of one's apartment or villa then declines. 

Mr Aldendorff said: “How many owners have disappeared or are just not paying? And how viable is it to put a property on the market in an economy where nobody is buying? The legal process is so lengthy, we won’t be able to immediately recover the money.”

There's an even more serious question.  Who in their right mind is going to buy into a property - even in a good market - where there are substantial arrears?   Unless perhaps one is the buying the last defaulter's unit.

If there are projects with a 75% maintenance default rate, they are going to be hard pressed to recover.  And the 25% who do pay aren't going to be able to shoulder the defaulters' share - at least not without serious economic consequences.   One also expects that banks would (if they are alert, perhaps a questionable assumption) be highly concerned about deterioration in the physical condition of  their collateral on top of general market price levels.

There is a bright side.

As one of my local friends said:  "It's all part of the "Vision".  When the existing properties get run down enough, they'll have to be knocked down and new ones erected.  And there will be another boom."  At least perhaps from the demolition.

Limitless Limits Its Exposure: Pulls Out of Haute Development Malaysia

On 8 July Bandar Raya Developments Berhad announced that its subsidiary had entered into a conditional sales agreement with Limitless to buy its 60% stake in Haute Property SDN.  Haute was set up with UEM  (who own 40%) to develop luxury homes in Johor State.

Ardent will pay Limitless:

1. RM1.0 (roughly US$0.31) for Limitless' 60% stake in Haute.  (The company's unaudited financials show negative shareholders' funds).
2. RM 75 million (US$22.9 million) to reimburse Limitless for partial payment of development rights.  The amount will be converted to US$ at the FX rate at time of payment RM3.27 = US$1.00.  While the RM/US$ rate is currently RM3.196, this will not represent a loss to Limitless as it should get back the exact amount of US$ it paid.
3. RM1 million representing full and final compensation to Limitless for the RM10 million it advanced Haute for operating and development expenses.

The project is still in the development stage.  It's expected that there will be revisions to the development plan.

For those interested in a trip back to the original Limitless announcement, here is the link.

This move allows Limitless to exit the project with minimal losses and eliminates potential cash calls.  And no doubt not the last step by the various companies in Dubai Inc to reduce foreign projects to concentrate now limited resources at "home".

BTW anyone out there able to cite a single instance of such a comprehensive announcement on a GCC exchange?

The Curious Case of UAE Banks

Roula Khalaf at the Financial Times:

What’s going on at the banks in the United Arab Emirates? It is an open secret that the deterioration in their asset quality is worse than suggested by the size of problem loans, which credit rating agency Moody’s puts at 4.9 per cent of total loans at the end of last year.

Some accounting magic keeps the amount of reported troubled credits lower than actual.  Renegotiation of troubled credits another way that numbers are managed.   More distress on the way in terms of the full knock-on effects of the crisis.  

But fundamental support for the banking system posited.

No doubt.  

But weakness in the banks will lead to lower loan growth.  Those loans granted will have stricter terms.  And thus there will be an economic price to pay.

DHCOG Secures Two Month Extension on US$555 Million Loan

This morning DHCOG reported on Nasdaq Dubai:

Dubai Holding Commercial Operations Group LLC (DHCOG) confirms that all parties have agreed to extend the existing Revolving Credit Facility (RCF) of $555 million under commercial terms for an additional 2 months. 

 The extension is required to facilitate the finalization of the documentation to renew the facility .

WallSt WTF "Appreciation" of Damas Saga

Ken over at WallSt. WTF has an "appreciation" of the Damas saga.  Well worth a read if you haven't seen it.

Walid Shihabi Rejoins Shuaa Securities as CEO

As per an announcement on the DFM.

In this regard Mr. Shihabi was quoted as saying:

“It is with great excitement that I look ahead towards taking responsibility for one of the truly outstanding brands in the region’s securities trading market. I believe there remain tremendous avenues for growth  available to the company, and I am truly privileged to be in this position to help guide the company to further success, after having participated in building it into one of the largest and most respected investment banks in our region.”

Personally I would have hoped that the new CEO would have shown a bit more enthusiasm for his new role and a bit more faith in his new employer.

More Signs of Real Estate Woes in the UAE

According to Bradley Hope at The National, Sorouh Real Estate has introduced a "rent-to-buy" scheme for commercial tenants at its Sky Tower on Reem Island.  The plan is apparently designed to "fill out" the remaining 20,000 square meters of commercial space.  Previously, Sorouh had offered a below market rate of 4.99% to first time buyers at its Sky and Sun Towers in the Shams Gate project on Reem.

This follows the announcement earlier this week that Dubai had given Nakheel's Board control over Limitless.    I suspect this is the first step towards combining the two companies as a way of reducing costs as well as adjusting capacity to realistic prospects for demand.

As you'll notice from this article also from The National, Limitless' problems were caused by the "global" (financial) crisis.   On a personal note, I was gratified to see that TN did not use the term "Global Financial crisis" using the SAM stylebook with all lower case letters.  There are some sensitive folks up North as AA knows only too well.

Moody's Downgrades DHCOG

Asa Fitch at The National has an article on Moody's recent downgrade of DHCOG.

"The credit ratings agency downgraded Dubai Holding Commercial Operations Group (DHCOG) by one notch on its rating scale to “B2” from “B1”and kept it on review for another drop. DHCOG, which has large holdings in the hospitality, business parks and property sectors, was unavailable for comment. The group was downgraded to “B1” last December, a rating already considered below investment grade."

You'll recall that last January, Dubai Holding had excoriated S&P for its:

1. manifest "lack of understanding of DHCOG's business, its operations and relationship with the Government of Dubai." 
2. "inaccurate statements coupled with factual errors that are misleading."  

While it may be unclear to some if Moody's is suffering from the same affliction or if S&P was indeed right after all, there's no confusion here at Suq Al Mal.

Jones Lang LaSalle: "Dubai Real Estate Slowdown to Continue"

You've probably seen reports quoting Jones Lang LaSalle's prediction that half of Dubai's commercial office space will be vacant in 2011 and that the residential property market will also be under stress until then as well.

Well, here's the original JLL report that is the basis for those news items.  Besides containing more information, the JLL report also provides some nuances.

Commercial Office Real Estate

1. While there is a substantial vacancy rate in commercial office space currently at 38%,  only 12% of single ownership stock in the Central Business District ("CBD") is vacant.
2. JLL sees very little demand for "strata titled" space.
3. There is in some respects a shortage of good quality supply (location, specification, legal title) as evidenced by the lower vacancy rate in the CBD.

Residential Space

1. Rents for  higher end apartments (Burj Khalifa) continue to decrease significantly.
2. Higher end villas are hit even harder.

Retail Market Space

1. Estimated Rental Values down 39% from 2Q09 to 2Q10.
2. Retail sales growth expected to come from department stores and mid market value chains rather than luxury goods.
3. No significant new supply until 2013 (Mall of Arabia in Dubailand).

Hotels

1. Beach hotels have higher Average Daily Rates than business hotels - AED1,386 versus AED660.
2. New hotels are expected to intensify competition and lead to a decline in ADRs not a decline in occupancy percentages.

There's a lot more in the report and you can "mine" it according to your own interests.

British Architectural Firm Sues Dubai Properties for AED27 Million (US$7.3 Million)

Bradley Hope over at The National reports that Hopkins Architects, a major UK architectural and engineering company, is suing Dubai Properties in the DIFC Court  (Court Case CFI 034/2009) for AED27 million (US$7.3 million) for what it claims are unpaid fees and costs it has incurred in connection with Central Park 08, a set of twin 50 storey towers next to the DIFC.

As per the DIFC Courts website, Dubai Properties has until 12 July 2010 to present its defense.

This amount is rather small beer in financial terms.  And failure to pay reflects either a very serious commercial dispute.  Or a rather severe cash crunch at Dubai Properties.

The article leaves the impression that HA stopped work because of non payment and then DP sought to cancel the contract.  Assuming this is correct, it would seem then that DP would owe HA for work to date less any deductions for any damages it can claim against HA.  From the article it sounds as though DP is not raising any counterclaim against HA, though it may still be early in the legal game.

In any case, I am taking comfort as I suppose we all should by the recent words of a high placed guy in the Emirate who should know the score.  While this quote refers to Dubai World, I'm sure that it probably equally applies to Dubai Holdings.

"I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."

Though I'll confess I'm not so confident about HA collecting its receivable.

DIC Cashes Out of Merlin (Madame Tussaud's)

Asa Fitch over at The National reports that DIC has sold its remaining 6% stake in Merlin to CVC.  No doubt an element of cash need drove the sale, though DIC received the lion's share of its return in 2007 when it received GBP 1 billion in cash plus 17% of Merlin.  This is compared to the purchase price of GBP800 million in 2005.  

The additional amount for the sale to CVC is icing on the cake.

According to CVC's press release on the sale, the ownership of the Company is now KIRKBI 36%,  Blackstone 34%, CVC 28%, management 2%.

With no single investor holding majority control, managing the Company will be a bit trickier than if there were a dominant shareholder.   

On the other hand, a distinct benefit is that cash calls for new equity (if any is required) will not fall disproportionately on any one shareholder.  

The Company needs cash to fund its "ambitious growth programme" as the CVC press release states.  And there is the unfortunate bunching of loan maturities - the extension of which is being negotiated currently.  Both potential cash demands.

Additional debt financing is unlikely.

The CVC press release also states that "Merlin does not intend to increase its financial leverage."   I suspect that the decision reflects more than sober financial self-discipline. Bankers are now less willing to lever up the company than they were during the  "Bonny" days when Charterhouse owned Madame Tussaud's.  Then loans were abundant.  And with easy terms - long dated bullet loans.    

That leaves additional equity.

Last October, the Financial Times reported that Merlin would IPO in 2Q10 with the transaction mooted at some GBP2 billion.  The sale to CVC suggests that the IPO route is not as likely as there is little reason for Blackstone to reduce its position in a trade sale if an attractive IPO is imminent. 

The remaining source is private equity - and perhaps a rationale for several rather than one dominant shareholder.

Dubai: Self Made Challenge

HH Shaykh Mohammed Bin Rashid AlMaktoum set the record straight in an interview with CNN.  Or more precisely will do so next week when the interview airs.

Like Global Investment House in Kuwait, Gulf Finance House in Bahrain and several other careful students of the market, he's identified the sole cause of current problems - the global financial crisis.  As we always note here at Suq Al Mal out of an abundance of caution to prevent anyone from drawing the wrong conclusion, that's global with a lower case "g".

"The recession is a global phenomenon and I do not think that we in Dubai fear it, but instead we consider it a challenge."

It's often said that true progress and development comes by challenging oneself.  Sadly, other members of the GCC, like Qatar, apparently don't feel up to challenging themselves in quite the way that Dubai is challenging itself.

While in reference to Dubai World, he adds: "I'm not worried about the company, the company has got the wealth. So they have something, and they will come back very very quickly."

Damas - Enforceable Undertaking Latest Developments

A rather enigmatic press release from Damas on Nasdaq Dubai this morning.

Three points of note:

1. Damas International Limited ("DIL") is negotiating a Cascade Agreement with Damas Investments Limited and Damas Real Estate Limited, the Abdullah Brothers who own both companies, and their respective creditors.  "The purpose of the Cascade Agreement will be to effect an orderly realisation of the assets of the Abdullah Brothers Group. DIL and its board will at all times continue to act in accordance with their legal duties."
2. "DIL notes that its undertaking to recover amounts owing from the Abdullah Brothers at paragraph 17.37 of the DIL Enforceable Undertaking is expressed to be subject to any stand-still, restructuring, security, cascade or similar agreement with the Abdullah Brothers Group and their creditors, including DIL. DIL further notes that in the enforceable undertaking given by the Abdullah Brothers dated 21 March 2010 (the "Abdullah Brothers Enforceable Undertaking") the obligation to repay the Drawings Amount (as defined therein) to DIL at paragraph 15.11 is expressed to be on terms and conditions either already agreed or to be agreed with DIL. Further, the obligations of the Abdullah Brothers to use the net proceeds of realisation of assets to repay the Drawings Amount at paragraph 15.12.1 of the Abdullah Brothers Enforceable Undertaking is expressed to be subject to the terms of any settlement, stand-still, restructuring, security, cascade or similar agreement with creditors (including DIL)."

It sounds as though Damas is in the process of revising the original repayment schedule agreed with the Abdullah Brothers.  No doubt legally required in terms of the rights of all creditors.  What it probably means for DIL is a longer payback period.  And depending on the assets, perhaps less than 100% payout.  From what I've read it seems likely that many of the investments may be problematic to sell at original cost.

Hashem al-Dabal Released After Repayment of AED130 Million

Business Maktoob reports that Hashem al-Dabal, former Chairman of Dubai Properties, has been released after repayment of AED130 million he allegedly embezzled in his former position.

Dubai Rents Continue to Fall

Emirates Business reports that rents in Dubai continue to fall with new supply responsible for the price pressure.  Lower rates in Dubai are tempting relocations from the Capital.  As if the Abu Dhabi - Dubai deathway isn't busy enough.

Given the number of new units coming on stream in the next two years - estimated here at 100,000 - it seems this trend is likely to continue.

"Tenants are increasingly seeking more value for their rental dirham and are able to leverage alternative options to negotiate very attractive deals. This is pushing up bid-ask spreads and illustrates that landlords are conceding in negotiations with ever more discerning and value-seeking tenants. More significantly, this is a trend now observed in high-quality units in prestigious locations, which is a segment that has experienced relatively minimal volatility in late 2009 and the first quarter of 2010 due to relocation trends.

The lower limits for a one-bedroom on the prestigious Jumeirah Lakes Tower (JLT) have fallen six per cent while one-bedroom apartments in JLT have fallen a further 10 per cent since publishing the previous lease guide."

Dubai World - Implication of Loan Sales

The Financial Times reports that some banks have begun selling their almost restructured DW loans.  Apparently, the price is something in the 55% of nominal range.   The article goes on to say that DW is considering using "Decree 57" which created a special regime for DW to seek protection under the DIFC Insolvency Law.  Under that law, a company may cram down dissenting creditors and force them to accept a restructuring - similar to the Financial Stability Law in Kuwait.

Some observations:

1. It's not surprising that some banks would be heading for the exit and perhaps taking a larger than required "haircut" just to be free of the restructuring - including those often overlooked indirect costs of administering and following a "special" loan.   Exitors will generally be smaller banks with no real ongoing business with the Emirate.
2. A US$25 million sale out of US$23.5 billion does not a trend make.
3. It's unlikely small trades will give dissidents control unless the existing lenders are highly divided on the restructuring.  On this topic recall that the Co-Ordinating Committee accounts for some 60% of the debt.  Local lenders are likely to go along.  If required, local governments can promise them a capital infusion or low cost deposit to compensate for any direct pain they may feel on the restructuring.  Both methods of course would strictly speaking not constitute preferential treatment.
4. From an investment point of view, assuming a bullet repayment, the IRR on the cited transaction is something around 11%.  With more frequent principal repayments the IRR is higher.  Not a bad return.
5. The public announcement of the readiness to pull the DIFC trigger no doubt is designed to dissuade vulture investors.

Dubai Holding Dissolves DIC Board and Takes Direct Control

GulfNews reports that Dubai Holding announced that it had dissolved the Board at DIC and taken direct control over the Company.  The cover story is that this was done to "implement a new (corporate) governance structure".

I suspect that as well it reflects a new corporate strategy.  Given the less than sterling performance of DIC and much more limited resources available to Dubai going forward, the Emirate has probably wisely decided to slowly unwind DIC.  That grandiose dreams of an international empire will have to be shelved in favor of making sure the economy back home is taken care of.  

The first step on the new path will be trying to get creditors to extend maturities until markets improve and assets can be sold.  Then triage on the existing portfolio.  Letting those entities that cannot be saved go.  And focusing limited cash on retaining control of and building value in those that have potential for a price rebound.

No longer on the Board of DIC, Samir AlAnsari will have a new role at Shuaa Capital.  Instead of building an empire through acquisition, he'll be tasked with building a business the old fashioned way - disciplined growth.

Damas Engages Abdullah Brothers as Senior Advisors

Here's an interesting bit of news from Business 24/7.

"At a time when Damas is going through a period of transition and pursuing a renewed strategy for its sustainable growth, the involvement of the Abdullah brothers in an advisory capacity provides us [with] significant depth of knowledge and insight," a spokesperson for Damas International Limited (DIL) said.

Presumably they've been engaged to give advice on marketing and design and not on corporate governance or financial matters.