Analysis of Dubai Government 14 December Statement on Restructuring Dubai World

Below the dotted line is the text of the announcement made by the Dubai Government on 14 December 2009 regarding the US$10 billion  support from the Emirate of Abu Dhabi and the restructuring of Dubai  World. My comments are in blue italics. One caveat:  My analysis is based upon the press release having been  crafted with the import of each word and sentence carefully considered.   That may not have been the case for a variety of reasons, including time  pressure.  That theory is somewhat supported by the fact that there are  two almost identical press releases issued by Dubai within less than  one hour. ------------------------------------------------------------------------------------------------------------------------------

WAM Dubai, Dec14th, 2009 (WAM) --- Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee (SFC) reassured investors, financial and trade creditors, employees, and citizens all out support of the government and has said that Dubai is, and will continue to be, a strong and vibrant global financial center. "The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy", he said in a statement on Monday. "The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders," he added.  AA:    With the apparent agreement of the Emirate of Dubai, Nakheel has paid the holders of its US$3.52 billion sukuk US$4.1 billion.   That is, the holders of the sukuk are not being asked to participate in the restructuring – either in terms of a retiming of their repayments, the interest rate thereon or the amount of any adjustment ("haircut") of principal. Assuming that the point of the rescheduling will be to ask other creditors to accept some or all of these steps, exactly how  are the interests of all stateholders being served? If this payment is a preference of one group of creditors over another, precisely what "high standards" have been applied?     The Government of Dubai, acting through the Supreme Fiscal Committee ("SFC"), today announced a set of actions in relation to Dubai World. Full text of Sheikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee statement: Like other global financial centers, Dubai has faced recent market challenges driven by global economic slowdown and severe real estate market correction.  Recently, Dubai World announced that it might not be able to commercially support its obligations. Since that time, the Government of Dubai has worked closely with the Abu Dhabi Government and the UAE Central Bank addressing and assessing the impact of Dubai World on the UAE economy, banking system and investor confidence.   AA: This sounds the theme of separation between Dubai World and the Emirate. Something that I have noted that careful lenders and investors should have been aware of from day one. The following provides comprehensive set of actions: First, the Government of Abu Dhabi and the UAE Central Bank have agreed to provide important support. Specifically, the Government of Abu Dhabi has agreed to fund $10 billion to the Dubai Financial Support Fund that will be used to satisfy a series of upcoming obligations on Dubai World.  AA: Does this mean that other creditors (in addition to Nakheel sukuk-holders) will be paid their obligations.?   Simply because those obligations come due before others?  Meaning that those creditors whose obligations are not so temporally favored will have to reschedule their obligations?     Perhaps, more importantly, note the words "has agreed to fund".  This implies that the full US$10 billion has not yet been disbursed. As a first action for the new fund, the Government of Dubai has authorized $4.1 billion to be used to pay the sukuk obligations that are due today. The remaining funds would also provide for interest expenses and company working capital through April 30, 2010 - conditioned on the company being successful in negotiating a standstill as previously announced.  AA: This does not appear to contemplate any repayments of principal.  Yet the paragraph prior to this one specifically mentions "upcoming obligations". Are these only interest? Or do they just comprise trade creditor obligations?   Crtically, how is the support conditioned?   Will Abu Dhabi only disburse the funds if a standstill is negotiated? A bit of leverage to use against the creditors.  Though  this admission is a two edged sword.  If Dubai World cannot pay interest on its obligations absent this cash infusion, how will it pay the obligations themselves?  This deferred disbursement mechanism also gives Abu Dhabi significant leverage over Dubai.    In addition, the Government of Dubai is particularly focused on addressing the concerns of Dubai World trade creditors within the Emirate of Dubai. To help address these concerns, today the Government of Dubai is announcing that the remainder of the funds provided will be used for the satisfaction of obligations to existing trade creditors and contractors. Discussions with affected contractors will begin in short order.  AA: The concern is stated as being particularly for trade creditors within the Emirate of Dubai.  Does this mean that those outside will not receive the same treatment? It is also unclear how much is the amount (the "remainder of the remainder") to be devoted  to this group of creditors. Within DW's trade creditor group within the Emirate of Dubai, will only past due amounts be paid?  Here I have the same question about "preferences" though on a temporal basis rather than geographic basis. Next, the central bank is also prepared to provide support to local UAE banks.  AA: Two reasons this support might be necessary.  The first because other banks refuse to lend  some UAE banks over concern about  their creditworthiness related to exposure to Dubai World.  Here the CB UAE would provide liquidity support.   The second because the local banks were potentially subject to serious losses on their DW exposure.  Here the CB UAE would provide various forms of support including perhaps capital infusions. On 29 November the Central Bank announced additional liquidity support for both local and foreign banks in the UAE.   Is thie press release merely restating this support?  Or is this a new statement related to the second rationale for support? Finally, today the Government of Dubai will announce a comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.   AA: A not too subtle hint to creditors: do a deal or face the consequences.  Realistically, the law and court will probably have to be resorted to in order to secure creditor approval of the restructuring package. The "new" law provides that if more than 75% of creditors vote for a reorganization plan it is accepted and binding on all creditors, which provides a much needed cramdown mechanism. Explained in more detail in this earlier post.   Today's actions, taken together, demonstrate our strong commitment as a global financial leader to transparency, good governance, and market principles. There will certainly be challenges periodically, just as there are challenges in other major financial centers around the globe. We believe today's actions will best serve the interests of all stakeholders.  We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices. Dubai is, and will continue to be, a strong and vibrant global financial center. Our best days are yet to come.  The Government of Dubai remains committed to its high standards and its obligations. We are confident in our economic model, and we are confident in the long-term health and outlook for our economy. The actions taken today are consistent with our market development, and we believe they are the actions that will best serve the interests of all stakeholders." WAM/AMIR

Cobalt IPO

I had mentioned this "compelling" investment opportunity earlier.

Seems the IPO was priced at US$13.50 per share below the initial price talk range of US$ 15-17 and even then only raised US$850.5 million.

This NY Times article has some quite apt quotes.

1. Cobalt International Energy Inc. hoped investors would contribute more than $1 billion to its search for oil miles beneath the ocean even though it has no proven reserves and it expects no revenue for at least another two years.  
   
2. Cobalt is a risky bet, say analysts who research IPOs.
3. ''IPO buyers are looking for financials that are tangible, a revenue stream that's visible and profits. They're not looking for concepts right now,'' said Scott Sweet.  It is unusual for an oil and gas company to go to the public markets without reserves in place or production under way, said research analyst Nick Einhorn of Renaissance Capital based in Greenwich, Conn.   ''There's a lot of risks but I think for an investor who kind of believes in this deepwater opportunity, it is a good way to get 100 percent exposure to that,'' he said.

I particularly like this last quote.  It is indeed an excellent way to get 100% exposure to risks that one kind of believes in.

Nonetheless, US$850.5 million was raised.  

Harassment of Women

SAA

A distressing article.

Much stern talk comes from self-proclaimed defenders of Islam about the conduct of women.

Since my own reading of the Qur'an (Sura AlNur as above)  suggests that there is an obligation on Muslim men as well, I have a question for these defenders of virtue and preventers of vice.

Does their failure to devote at least equal time to men's conduct reflect a determination that

1. there are no truly Muslim men in the country to admonish and so no need to speak up
   
2. that men - whether Muslim or not - cannot be taught morals (as apparently women can) and so such efforts would be without result?
   

As a side note, once Umm Arqala (of Shirk fil Baraada fame) was walking along the corniche in Cairo and some young lads made some rude comments.  She turned and asked them (in what she described as a rather loud voice)  if they respected their mothers and sisters.

As with the tahini episode, I was absent.   Local mutawi'iyn and their  unofficial ansar were strangely absent.  Remarkable as the corniche was packed.  Perhaps though it was filled with those from more permissive religions or none at all.   Later that day we were walking in those same steps.  When the young lads saw Umm and Abu Arqala approaching, they scurried away.   I'm guessing not hurrying to salat.

But God knows best.

Kuwait Offers UAE Financial Assistance for Dubai

As per Bloomberg, Shaykh Muhammad AlSalem Al Sabah, Foreign Minister of Kuwait, revealed on the sidelines of the GCC conference in Kuwait that he had called his counterpart in the UAE to offer both moral and financial support to the UAE with financial problems.

A nice gesture.  UAE advised that it didn't need financial assistance.

ADIA Files Arbitration Claim to Terminate Citigroup Stock Purchase

Bloomberg reports that ADIA has filed an abitration to abrogate its obligation to purchase Citigroup stock at a price currently more than 9 times market.

Here's a more detailed report from Reuters.

As you'll recall, ADIA invested US$7.5 billion in Citicorp mandatory convertible securities in November 2007.  The strike price is a rather unattractive US$31.83 per share with the first purchases scheduled to begin in March 2010.      Earlier post here.   Citigroup is opening this morning around $3.47 share.

Another post on convertible securities and the importance of deal terms.

Ahli United Kuwait Confirms Receipt of Nakheel Payment

Ahli United Bank of Kuwait informed the Kuwait Stock Exchange today that it had received US$23.4 million from Nakheel representing principal plus interest.     Since it's likely that all bond holders were paid on the same date, this implies that Nakheel's payment on its sukuk maturing this Monday has been made.

Earlier AUK had disclosed exposure to Nakheel of some US$20 million.  With this payment, AUK would have no further exposure to Nakheel or Dubai World.

Here's today's announcement to the KSE.

[8:42:5]  

ِ.(اهلي) يستلم مبلغ 23,4 مليون دولار امريكي من شركة النخيل الاماراتية ‏
يعلن سوق الكويت للاوراق المالية بان البنك الاهلي الكويتي افاد بانه ‏
قد استلم مبلغ 23,4 مليون دولار امريكي يمثل اصل الدين مع الفوائد ‏
المستحقة فى تاريخ الاستحقاق من شركة النخيل العقارية التابعة لمجموعة ‏
دبي العالمية المملوكة لحكومة دبي.‏

The International Banking Corporation Bahrain Files For Chapter 15 Protection in Manhattan

Bloomberg reports that TIBC has filed under  Chapter 15 of Title 11 (Bankruptcy) of the US Code seeking protection from creditors.

As pointed out in the article, Deutsche Bank and Mashreqbank had obtained orders of attachment against TIBC assets in the USA.

Through this filing, TIBC seeks to provide legal protection against those two banks and any other creditors who might try to seize its US based assets.

Not surprising.

Two bits of news in the article.

1. First, for those who may have missed the news earlier: Ernst and Young has been engaged to investigate the business of the bank.  This relates to the allegations by AlGosaibi that Mr. AlSanea was engaged in improper transactions with the assets and companies of the AlGosaibi Group.TIBC's auditors are PwC.  Also Awal's.
2. The filing also reported assets of US$ 4 billion and liabilities of US$2.6 billion as of 31 July 2009.  At FYE 2008 (the last officially issued financials) the comparative numbers were US$3.8 billion and US$2.5 billion.  One would expect that financials would have been updated for any dimunition in value unless the nominal value of assets is being reported.
   

Global Investment House - Pictures From Sunday's Reception

Here's the link.

New Bankruptcy Law for UAE

It appears that the UAE will be adopting a revised bankruptcy code in the new few months as per reports in Gulf News (Dubai).

You'll recall that the UAE did not have stellar rankings for its bankruptcy regime in the World Bank/IFC "Doing Business in the Arab World -2010" report.

Click here and go to page 41 and you'll see that the UAE has the dubious distinction of not only having the lowest recovery rate in the GCC but also at 10.2 cents in the dollar just beats out Mauritania among those Arab countries with the lowest rates.

So presumably this will be an improvement.

National Day - Bahrain

Happy National Day. 

And 10th anniversary of the accession of the King.

Real Estate Problems at Faysal Islamic Geneva?

If true, not a pretty story.

Not from a return on investment perspective nor a fee perspective.

Sukuk Disclosure - NasdaqDubai

NasdaqDubai asked all of the issuers of listed sukuks the following questions:

1. Is the Issuer aware of any Price Sensitive Information concerning the Sukuk that has not been disclosed to the market?
 

2. Is the Issuer aware of any other Price Sensitive Information concerning any of the following (if applicable)?
a. The Issuer itself;
b. Any guarantees;
c. Covenants;
d. Cross Defaults;
e. Any restructuring plans;
f. Coupon Payments or Principal Payments;
g. Credit Rating changes;
h. Exposure to debt of other Dubai-based entities; and
i. Any other matter of a material nature required to be disclosed under the OSRs or Listing Rules.
 

3. Please confirm that the Issuer is in compliance with the Listing Rules and, in particular, the continuous disclosure obligations under Listing Rule 28.1.

Now, as we all know the financial crisis in the Gulf is over, but if there are some skeptical souls still out there you can check here.

If nothing eslse, you might want to see if your sukuk issuer responded.  Since the questions are rather routine, that bit of info might be quite telling.

Manifest Delusions - The West, The Developed West

Having commented yesterday on continuing manifest delusions in Dubai, it is only fair to cast an eye outside the region.

Today's FT regular feature "The Short View" contains the following lead paragraphs:

"There was a sense of relief in the markets yesterday. Abu Dhabi's $10bn bail-out of Dubai was cheered while Greece, the wobbliest eurozone member, strove to reassure investors of its plans to manage its own parlous finances.

Put them together and they look like a calming of the sovereign risk fears that arose last month. Of the two, Greece is the more important as an example of the danger posed by the market's lack of faith in a government's ability to manage its spending."

The FT has captured the market's reaction quite well.

One wonders (well, at least AA does) what the "efficient" markets are thinking.  Or precisely if they are thinking.

A borrower with by some accounts $100 billion in debt has avoided a default by the timely kindness of the Shaykh up the road.  But the charitable contribution was for only for one-tenth the sum.  Upcoming debt maturities still loom.  The value of the borrower's largely debt-financed assets - which are composed primarily of overpriced and extravagant domestic and foreign adventures - are still depressed and unlikely to rise in value to their original cost in the next few years.   Operating cashflow remains weak - ignoring of course unrequited transfers as defined in balance of payments terminology. 

As far as I can see, there has been no fundamental change in that borrower's debt position or its financial resources., including cashflow which according to my experience is what most debtors use to settle their obligations.    There is even some disturbing indication that the borrower has yet to put aside its own delusions.  Yet markets are euphoric.

A politician from another borrower in the "developed West" has stated what everyone with a modicum of intelligence has known about his country for years.  He has vowed to do something about it. 

Yet again markets are relieved and calmed.

Developing a severe case of financial euphoria based on last minute bailouts and the apparent magical belief that they will continue seems a bit of an over reaction, one potentially hazardous to financial health.  Though I suppose there is something to be said for consistency.  After all by and large the  original commitments seem to have been based on the same sober theory.

Even more puzzling is what charitably might be described as naive credulity in the promises of politicians. While as the mandated warming on finance literature says "past performance is no guarantee of future results", it does seem that a careful investor would scan the historical record for some insight into probabilities.  In AA's experience a politician's promise generally has less worth than the famous implicit guarantee.

All this  I suppose explains the Cobalt IPO.   A company with a postulated market value of US$5.3 billion despite the lack of any current revenues and no prospects for revenue for the next two years. The shares of which are described by one wag as a lottery ticket.  

Sadly, I'll have to turn this down.  I've just received a compelling email investment proposal from a chap in Nigeria.  And not only will I be making myself rich but I will be helping out someone retrieve his father's ill gotten gains temporarily blocked by unsympathetic authorities.  But prudent investor that I am, I'm not putting all my money in just one bright idea.  I've got another email today and for a small sum, I can buy a share in ElGordo ticket.

I see an apartment in the Palm in my future.  High floor only.  A very high floor.  AA does read more than just the financial press.

Dubai Crisis Fallout

The economic impact of the crisis in Dubai is not just the Government of the Emirate or the Government-owned independent commercial enterprises but other participants in the economy.

Here's the story of one small firm.

Resignation of Deputy CE at Shu'a Capital

Karim Mitri has resigned.  It seems to pursue other interests.  Announcement thanked him for his many contributions.

Central Bank of UAE - New Disclosure Page: Data on FI Ownership

CB UAE has added a new disclosure page to its website detailing ownership in:

1. Banks
2. Finance companies
   
3. Investment firms
4. Money changers

AlGosaibi Shopping Assets?

AlQabas newspaper has two articles on reports of potential asset sales by AlGosaibi.  Both are based on articles in Akhbar AlKhalij AlIqtisadi.

The first concerns the flagship Pepsi business.

As per unnamed sources within AlMarai, they are in negotiations with Ahmad Hamad Gosaibi and Brothers ("AHAB") to purchase the Pepsi factory in the Eastern Province, the bottling rights, and installations.  These include as well the bottling (canning) plants in AlDammam and AlKhobar and the can factory in Jeddah.  Not included in the contract are bottling (canning) plants in Jabal Ali (Dubai) or in Jordan or Tunis.  No details were given about the size of the contract.

The article goes on to say that one motive for the sale is that Pepsi Co is considering withdrawing the Pepsi agency/franchise in the Eastern Province from AHAB due to its financial problems.

As a side note, those who follow affairs in the Kingdom know that currently there is a big flap going on about the increase in the prices of Pepsi products - in some cases 50%.  The Ministry of Commerce is investigating the increases.  By the way the higher outrageous price is SAR2 per can (roughly US$0.53).

The second article concerns their shares in National Gas and Industrialization Company ("Gasco").  According to the article, AHAB owns 4% of the company and is looking to sell its shares.  No potential buyer was named.  Gasco is owned 70% by Sabic with 30% owned by various Saudi companies.  The Company has 75 million shares.  This would make AHAB's holding 3 million shares.  At today's closing price of SAR23.7 per share, AHAB's stake would be worth SAR 71.1 million (roughly US$20 million) somewhere around one half month's interest on US$10 billion of debt.

Of the two the Pepsi sale has the larger cashflow potential.  But it's unclear why AHAB's financial problems would also not be a motive for Pepsi to cancel their agency outside the Kingdom, unless of course there is no cash constraint on the ex-Kingdom operations.

The Gasco sale seems too little to be of consequence in the context of a US$10 billion aggregate debt.  Maybe it is the visible tip of a larger program of asset sales.  Or perhaps it's for working capital.

Manifest Delusions - Dubai

One would have thought that recent events would have resulted in a bit of introspection and restrained behavior.  Unless of course one was familiar with the region.

Today's Khaleej Newspaper (Dubai) has a lead article entitled "We Can Do It".

Here is the first paragraph.

"GLOBAL crisis or not, Dubai has done it again. It has once again shown the world, beyond doubt, its ability and willingness not only to meet its obligations but any challenge to its unrivalled status as the most dynamic global financial and trading hub in the Gulf region."

I'm not sure precisely what Dubai has done. 

As I understand things, the kindly Shaykh up the road has sent around US$10 billion to be used to settle Dubai's debts.  And Dubai is mailing the check.   How that shows ability is beyond me.  And how living off the kindness of strangers beats back challenges to a postulated "unrivalled status" also escapes me.

On careful reflection, I can see how this might apply to my own life.  And that certainly gives rise to a proud feeling.

When I was a young lad, I used to make my parents' monthly mortgage payments.  Quite a feat for a lad of 10 or 11 when I first started.  Mom or dad would write the check and put it in the envelope.  I would take the envelope down to the postbox.  So it is clear that I made the mortgage payments.  Sometimes I even put the stamp on the envelope - which must count for even more.  I trust you can imagine the effort as these were the days before the self-adhesive postal stamp.

Having demonstrated both my ability and willingess to make payments in younger days, when I was at university, I never missed a payment of tuition or other fees.  Mom and dad used to send me the money which I deposited in my account.  Then I wrote the check myself.  I trust you notice the progression in my ability and willingness.  I think it's fair to say that I held an unrivalled status as fairly dynamic financial intermediary. 

We shall omit detailed discussion, however, of my many and consistent economic contributions to the business of the local pub at school largely funded through my own meager earnings supplemented now and then by parental largesse.  Let us say that my and my friends patronage resulted in a fairly dynamic increase not only in revenues but good cheer as well.  And if memory serves me, I believe we beat back many a challenge.  But then much of this is hazy.

Dubai Announces Special Insolvency Regime for Dubai World - Implications

No doubt you've seen the announcements today that HH Shaykh Mohammed Bin Rashid Al Maktoum issued a decree setting up special legal arrangements to adjudicate "Disputes Related to the Settlement of the Financial Position of Dubai World and its Subsidiaries".

Here is the official announcement from WAM.

Why was this step taken?

The press release advises that:

"The decree is based on the keen interest of Dubai Government in preserving the rights of Dubai World creditors, on its commitment to further strengthen the position of the emirate of Dubai in global economy as well as on its pledge to make sure financing establishments will get all their financial rights in view of the strength of its economy that is based on dynamism of the UAE economy which is capable of assimilating the consequences of the global financial crisis as well as on Dubai's big and diverse infrastructure and structural assets."

More importantly what does it mean?  No, not the press release. The decision on the legal framework.

The big picture answer is that it means a better legal regime for settling Dubai World and its subsidiaries' debts.  The DIFC legal regime is largely based on Western practice with a strong does of English law and practice at its core.

Is the DIFC legal structure better because it's Western?  No!.   Nor is it infallible. But its "foundation" structure has been repeatedly used, tested and refined over the years.  It is also one which is more institutionalized and less personal.  Something particularly useful in such cases - particularly when the amounts involved are large and there are large numbers of creditors. 

But at a practical level what are the implications?  And how does the process differ from that under local law?

Let's take a closer look.

First to set the stage, a focus on Section 4 of Decree 57 of 14 December 2009 which establishes these new procedures:  "The decisions and orders of the Tribunal shall be final, irrevocable and not subject to any appeal or review."  The parties to any court action get "one bite at the apple".  No appeals, though perhaps the Ruler might have a final word if there were a real controversy over the Court's decision.

Here are links to the Insolvency Law  ("IL") and the Insolvency Regulations  ("IR") so you can follow along.

And, as usual, before we begin the caveat that I am not a lawyer.

1. Insolvency Law ("IL") Part 2 Section 9 - When a company proposes a voluntary scheme of arrangement, it may petition the Court to impose a moratorium.  As per the Insolvency Regulations ("IR") Section 3, the Court decides if a moratorium is justified.   
2. What is the legal effect of a moratorium?  IR 3.5 stays any creditor legal action.  No steps may be taken to enforce rights. This includes secured creditors as per IR 3.6.   AA:  To the extent that foreign jurisdictions recognize the proceedings in Dubai as taking place under a reasonable law and process, they may honor the moratorium in their own jurisdictions.  I suspect they will given the ultimate origin of the law, the identities of the judges and presumed competence/impartiality in the matter at hand, etc. 
   
3. IL Part 2 Sections 10 and 11 provide for creditors to vote on the company's proposed scheme of arrangement.  As per IR Section 2.5,  passage requires the affirmative vote of more than 75% of creditors.   
4. IL Part 2 Section13 (3) - Provides that all creditors are bound by the vote of the meeting. AA:  This eliminates a major problem in GCC reschedulings:  the need for 100% creditor agreement to bind all creditors.  The DIFC Law in effect results in a legally sanctioned "cramdown". of any dissenting creditor.  To the extent I am right about other jurisdictions' views of these proceedings, a settlement will be an effective cramdown overseas as well.
   
5. IL Part 5 Section 68 (2)  provides that during a liquidation the liquidator may "disclaim onerous property" which includes unprofitable contracts, but only if it is not a members voluntary winding up.  AA: If creditors force a wind-up, some debt obligations might wind-up being voided.  As I've posted before, the requirements of sukuks often result in non market or potentially onerous contractual obligations.  Other contractual arrangements with non financial firms - contractors, suppliers, etc. - might be snared as well.  The occurrence of hardball legal tactics like these  are directly related to the assumed shortfall in recovery by the parties.  It's not likely that there will be a formal legal wind up or bankruptcy in this case.   If there is an economic need for one, it will be handled through a disguised liquidation portrayed as a restructuring/asset realization.
   
6. IL Part 10 Sections 96-100 deals with undervalue transactions, preferences etc..  The look back is two years prior to insolvency for transactions with a related party and six months for an unrelated party.  IL Part 5 Sections 73-79 also cover various transactions made in anticipation of a winding up.  AA: As outlined in an earlier post, since 30 June 2008, Nakheel has extended net credit to the Group of at least AED 12 billion.  On the other hand, the Nakheel Sukuk repayment will be exposed for six months from repayment.  However, all this is theoretical.  It is not likely that such claims will be made.  And perhaps not entertained if made.

To recap, what are the differences and does one party or another gain from them?

1. Moratorium:  Advantage to debtors versus the existing UAE law. The moratorium stops legal action in Dubai where the bulk of debtor assets are.  Since I think that other jurisdictions will recognize the Dubai proceedings and therefore stay legal action in their countries, it will effect a moratorium in other jurisdictions.  Thus, removing a significant legal weapon from the hands of creditors.  This is a common feature of "advanced" insolvency regimes. The test will be the creditors ability to end a moratorium if there is no consensual agreement to the borrower's plan which is the way I suspect any settlement will be structured.  At least initially.
   
2. Cramdown:  This is a major benefit to both parties by eliminating the power of minority creditors to hold up a deal. Additionally, if local banks - who are a significant portion of the debt - take  a more understanding view of the debtor's situation, they have the votes to block any amendment of the debtor's proposal for voluntary restructuring.  On the other hand local creditors do not have the votes to secure approval.  Foreign banks will have enough votes to prevent adoption. 
   
3. "Disclaim" of Onerous Contract and Obligations:  Depends on the situation and the sharpness with which the parties want to deal.  That usually is a function of the gap between assets and liabilities.  The lower the ultimate recovery the more likely that creditors will fight among themselves over the carcass.  But recall that this applies only  is in the context of an involuntary wind-up.  Probably not relevant here.  Unlikely that there will be a forced bankruptcy.  And as mentioned above if one is necessary, it will be disguised as a "restructuring".
   
4. Preferences:  Allows creditors to put pressure on the Emirate and fight among themselves.  Again usually motivated by fear of less than 100% recovery.  It's hard to imagine the Court entertaining such motions.  Or creditors raising them except under the most extreme situations.
   

On balance both sides are better served by a DIFC proceeding than one in local courts.  The law is better and the judges probably more familiar with commercial matters.  How this all turns out will ultimately depend on the estimated recovery for creditors.

Construction Industry in UAE - Reader Comment

In response to one of my earlier posts, another blogger with direct experience left a comment.

Since  not everyone reads the comments (but nonetheless a larger number than those who post  comments), I'm repeating his post here because it has some important information and context.

Here's what the "RealNick" has to say on the subject.

And here's a link to his blog.

"Abu Arqala,

1) Yes, I 'live' in the construction industry...but

2) It is difficult to get exact figures and vetted information in this country (until after the fact)- not just for delayed payments. The media doesn't help - Zawya Dow Jones newswire is notorious for lazy background research.

[Example: You may remember the figures sloshing around in the UK media earlier this year about 200 million pounds being owed to "British contractors" - as per 'ACE', an 'association of consultancy and engineering'. Firstly, ACE represents some (but not all) consultancy and engineering firms in the UK, but NOT contractors (i.e. builders / constructions firms). That's a big difference. I was actually interviewed once by a BBC journalist who did not know the difference between a consultant and a contractor. (Perhaps because in the UK anyone offering a service as a self-employed entity is deemed a 'contractor'. or because the words both start with a 'C'. Coming from today's BBC this wouldn't surprise me). As a result the figures of outstanding payments to consultants (fees) and contractors (progress payments fr work, minus retention etc.) were completely muddled up. Of course, it could only be outstanding fees and not payments to contractors-$300m buys you maybe five 20storey buildings..hardly worth reporting!]

Noone in the industry knows anything for sure, Abu Arqala. It's all hearsay from the majlises.

There are too many consultants and contractors out there who cannot or will not talk frankly - unless they actually wanted to destroy their name in this country. Remember, most companies in this industry here are family owned businesses. They are here for the long term. They have personal associations. They have been licking sandals for too long to risk being seen as detractors.

We in the industry are often paid 'in kind' (both consultants /contractors). Outstanding payments are delayed for years and then "suddenly" you get awarded a new job without much trying! How do you put that on a balance sheet?

Ergo, the only figures you hear about are from the newcomers who wanted to ride the wave and are now stranded on a sandbank (often literally).

Generally, it seems the only people who burnt their fingers in Dubai are those who arrived during the boom years to make a fast buck but without any knowledge about the country and its mores..."