Meeting of creditors is next test for Dubai World

Conference on Monday will probably be the start of lengthy process to reach agreement.

Dubai World faces another test when it meets creditors next week to begin discussions on its other debts, totalling US$22 billion (Dh80.8bn). After the relief of having met the deadline on Monday to repay the $3.52bn plus profit owed by Nakheel on its sukuk, UAE markets yesterday appeared to recognise that Dubai World still has a way to go to resolve its financial problems. The Dubai Financial Market Index fell 1.49 per cent and the Abu Dhabi Stock Exchange shed nearly 1 per cent.

Meanwhile, Moody's Investors Service, the ratings agency, placed under review three UAE banks and the regional business of global banking giant HSBC for possible downgrade because of exposure in Dubai. Abu Dhabi Commercial Bank, Commercial Bank of Dubai, and Dubai Bank, may have their ratings cut. Moody's also announced a downgrade of Tamweel, the Dubai mortgage provider, to "Baa3" from "Baa1" with a negative outlook.

Dubai World will meet representatives of more than 90 bank creditors in the city on Monday in the first meeting of what promises to be a long, drawn-out process of negotiation. The firm is seeking a standstill until the end of next April. The debts that Dubai World has placed under restructuring amount to $22bn after the sukuk payment. Though the company could provide no official breakdown of that figure yesterday between bank and trade creditors, bankers close to the situation estimate at least half that amount is in the form of bank debt, with British banks owed about $5bn.

Financial analysts and experts were divided on the implications of the sukuk settlement for the broader question of bank debt. "It is clear the banks will need to work closely with the borrower," said Dr Henry Azzam, the head of Deutsche Bank's Middle East business. "The fact that Dubai World has resources to continue paying interest while they try to negotiate a standstill is encouraging. "Most of the creditors have been doing business here for the long term and it's in their interest to reach an agreement. There was help from an outside agency for the sukuk, but it doesn't look as if anybody will step in on the question of bank debt."

Farouk Soussa, a credit research analyst at Standard & Poor's, agreed that there was still work to be done. "For bank creditors, I don't think the process has changed much since the Nakheel sukuk announcement," he said. "It is not a precedent. The creditors should not be expecting more liquidity. The Nakheel bond is off the table and there is a plan to deal with any potential insolvencies, but little else has changed."

Nakheel faces another bond payment of just under $1bn next May. The creditors meeting next week will finish the job of creating a co-ordinating committee and formally appoint advisers to represent the creditor banks. The British banks, Royal Bank of Scotland, Standard Chartered, HSBC and Lloyds, and UAE banks Emirates NBD and Dubai Islamic Bank are expected to comprise the steering committee. KPMG has been tipped to act as accounting advisers but is not yet confirmed. The committee is also expected to appoint an investment bank adviser.

IFR Briefings, the influential analysis bulletin of Thompson Reuters, said in its daily Gulf Markets Briefing: "There is still a significant smokescreen clouding the emirate's finances - concerns have been raised that lending banks are being pushed to the back of the creditor queue by the [Nakheel sukuk payment]. Banks which have provided loans to Dubai World and its subsidiaries feel the changes are likely to assist Dubai in driving a much harder bargain in the coming months.

"Their concerns are focused on the fact that the provision of continuing working capital for Dubai World is contingent on the implementation of a standstill agreement. Coupled with the clearer picture on the route a bankruptcy proceeding would take if the standstill is not agreed, bankers feel that the options open to them have been severely curtailed." Under chief restructuring officer Aidan Birkett of the UK accounting firm Deloitte, Dubai World is conducting a process of due diligence on the group, said a banking adviser close to the talks who declined to be identified. "Job losses and asset disposals are being considered," he said. This was confirmed by a spokesman for Dubai World who declined to elaborate. Dubai World shed some 12,000 jobs worldwide in September.

It is not clear whether the Dubai Government will be represented at the meeting next week. Moelis & Co, the US restructuring and investment specialists, have been appointed to advise the Dubai Government. @Email:[e-mail]