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Moody's: Dubai World Restructuring Agreement Would Help Restore Confidence in Dubai’s Financial Sector

Monday, 24 May 2010 10:37

Last Thursday, Dubai World Group (DWG) announced it had reached agreement in principle with 60% of its bank lenders to restructure $23.5 billion of debt and provided the details of the economic terms offered, reported Moody's Weekly Credit Outlook.

This announcement appears to be the last act of a restructuring story that began 25 November with the Government of Dubai’s announcement that it would seek to restructure the liabilities of DWG, the largest government-owned conglomerate in Dubai (owner of the former P&O ports operator and some of the major real estate projects in the emirate).
Since an agreement of more than two-thirds of total creditors could finalise this restructuring, we believe that there is high likelihood that agreement will be finally reached. Acceptance by bank lenders would go a long way towards confirming lower-than-feared loan losses for the banks involved and consequently for restoring confidence in Dubai’s financial sector, both credit-positive developments.

This agreement gives flesh to the restructuring framework that was announced 25 March and allows greater accuracy in estimating potential impairment losses. The ultimate restructuring loss depends on the banks’ choice of one of the offered restructuring options, which effectively blend different levels of interest payments and government guarantees. Therefore, we estimate that impairment losses on the restructured facilities will average 10%-20%, discounted at the original effective interest rates. As such, the effect of these losses on the banks’ Tier 1 capital will be less than 6%-12% for the most affected banks as of year-end 2009, reaffirming our initial assessment that this exposure by itself would not jeopardize the solvency levels of the rated banks, posing moderate risk to their ratings. Average Tier 1 capital for domestic UAE banks at year-end 2009 was 14.5%.

Dubai World should be able to serve the restructured interest payments, which are set below market levels (with a cash interest of 1%). In the absence of a fully detailed restructuring plan we are unable to gauge the potential for further restructuring or haircuts that may be required during the term of the restructured debt.

Although the restructuring of Dubai World debt seems to be reaching an amicable conclusion, uncertainty still surrounds the quality of certain sectors of Dubai private sector debt as well as public sector exposures. The potential for further restructuring within Dubai Inc. (the Dubai government-related issuers) is still high, with anecdotal information suggesting a possible restructuring of certain parts of Dubai Holdings (another major conglomerate owned directly by the Ruler of Dubai). Although too early to draw any conclusion on Dubai Holdings’ potential restructuring, we believe that achieving a final agreement on the terms of DWG would be a

SUMMARY OF DUBAI WORLD’S DEBT RESTRUCTURING TERMS
The Dubai World’s Group final indebtedness under restructuring would involve in total $14.4 billion divided into two tranches: tranche A of $4.4 billion and a tranche B of approximately $10.0 billion. Banks are expected to take exposure to tranche A and B pro rata (i.e., 30:70). Tranche A will have a maturity of 5 years and will pay coupons of 1%, while lenders in UAE Dirham are expected to receive an additional coupon measured as the differential between Eibor versus Libor capped at 1%. The principal is expected to be paid in full on maturity. Tranche B will have a maturity of eight years and it will pay coupons based on three options offered to the banks.

Option 1: pays 1% cash interest and accrues 1.5% interest payable at maturity, and a Dubai government guarantee for a rateable share of $4.0 billion.

Option 2: pays 1% cash interest and accrues 2% interest for years 1-5 and 2.5% for years 6-8 and a Dubai government guarantee for a rateable share of $1.0 billion.

Option 3: only for lenders in UAE Dirham, pays 1% cash interest and the difference between EIBOR and LIBOR up to a cap of 1 %, and accrues 1.5% interest payable at maturity. It carries no government guarantees.

Global Arab Network

Extracted from "Moody's Weekly Credit Outlook", dated May 24, 2010 - Dubai World announcement 20 May 2010

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