Dubai World questions offset recent gains

Local banks could be forced to accept a reduced interest rate as part of the debt settlement.

How will local banks fare under the proposed Dubai World settlement? Investors initially liked the terms, bidding up bank shares more than 21 per cent in the days after the terms were announced. But the Dubai investment bank Al Mal Capital yesterday issued a report advising clients to sell into the recent strengths of shares including Abu Dhabi Commercial Bank, Emirates NBD, Dubai Islamic Bank and First Gulf Bank.

Al Mal says there are more than enough questions remaining surrounding the proposed settlement to offset the recent gains. National banks are owed an estimated US$4.5 billion, and Dubai World proposed to roll over that debt into instruments that would pay off in five to eight years. The question is the interest rate. The proposal released last week did not specify an interest rate, but a document that was inadvertently leaked indicated Nakheel creditors would be treated differently from Dubai World creditors because Nakheel is an operating company, whereas Dubai World is a holding company.

While Nakheel creditors may receive commercial market rates for the restructured loans, Dubai World creditors may be offered lower rates and potentially a payment-in-kind, but that type of structure could have a significant accounting impact. For global banks such as HSBC, the hit does not have a major effect, but it is a bigger blow for local institutions. "Both creditors got the lesser of two evils [by not having to accept an immediate haircut] but Dubai World creditors should at least have a commercial rate," said Deepak Tolani, an analyst with Al Mal Capital.

If local banks are forced to accept a reduced interest rate, this could further exacerbate their liquidity issues, particularly as many suspect non-performing loans to continue to mount on their balance sheets due to problems with the property market in the region. "Local banks are between a rock and a hard place," Mr Tolani said. He said he expected the banks would be reluctant to sign off on the deal and may hold out for a better offer.