Patience wears thin over Dubai World debt restructuring talks

Most, but not all creditors are won over by DW’s logic – we will repay some debt early, and you will stay involved in the run up to Expo 2020, as long as you agree to extend on the rest of the debts.

There is in banking a phenomenon known as “deal fatigue”. It happens when negotiations over a particular transaction are taking so long, with problems that appear so intractable, that the participants are suddenly inclined to get up from the table and walk away.

It may be just for a brief pause and rethink about how to best approach the issue afresh, or it may become a complete withdrawal from the transaction altogether.

There are signs that at least a couple of the 100-odd creditors to Dubai World (DW) are experiencing deal fatigue at the moment and are wondering whether it is worth their while devoting any more time and effort to the issue.

To be fair, they have a case. They, and DW presumably, thought it had all been worked out in 2010, when the company clinched a restructuring deal for the US$25 billion of debt it was unable to repay.

That deal was portrayed as the one that saved Dubai from even more severe consequences from the global financial crisis and allowed the recovery to get under way. But for the past year or so, there have been mutterings that some elements of that restructuring would themselves have to be restructured.

The appointment of the US investment bank Blackstone as an adviser to DW earlier this year, with a “debt optimisation mandate”, confirmed that the conglomerate was looking to reshape the terms of the 2010 settlement.

In particular, it wanted to delay repayment of a $10.3bn tranche of debt, originally scheduled for 2018, until 2022. In exchange, it would repay early a smaller tranche, about $4.4bn, due next year.

DW must have thought the banks would be attracted by the “bird in the hand is worth two in the bush” argument and that the creditors would go along with the proposal to continue taking part in Dubai’s economic recovery.

Talking to people involved in the very early stages of the negotiations, it seems that most creditors are indeed won over by DW’s logic – we will repay some debt early, and you will stay involved in the economic boom in the run up to Expo 2020, as long as you agree to extend on the rest of the debts.

However, at least two large creditors do not appear to be convinced. Lloyds and RBS are wondering whether to stay involved in the restructuring process at all, and may even be thinking of selling their debts to the “special situation” traders who deal in distressed assets and who are sometimes known (unfairly) as “vulture funds”.

The sums involved are quite significant, amounting to at least 10 per cent of the debts proposed for restructuring: about $500 million each, according to those in the know, or maybe a bit more on the RBS side. (There is a third creditor, an unnamed French bank, with about $50m, thinking along the same lines.)

You can see why the two British banks are thinking like this. Both have effectively been operating under the control of the UK government since the bailouts of 2010, and are under political pressure at home to avoid risky foreign ventures and to concentrate instead on domestic business.

Other banks among the creditors, such as HSBC, are maintaining their ambitions to be global banks and are also keen to take part in the Dubai recovery story. Local banks in the creditor lists, such as Emirates NBD and Abu Dhabi Commercial Bank, are even more supportive of Dubai and are expected to take part enthusiastically in the restructuring.

The issue of Lloyds and RBS has slowed the formal start of restructuring negotiations. Both were prominent in the creditors’ coordinating committee in 2010, and the others do not want to start talking seriously with DW until they know who owns that big chunk of debt.

Likewise, if both sell to the special situation experts, that’s not a particularly good thing for DW. The vultures have a reputation of striking a harder bargain than commercial banks, who also do normal corporate business with DW and other parts of Dubai Inc.

Partly because of the recovery in Dubai’s economic situation, the value of the debt has risen. Traders talk about levels between 75 cents to 80 cents in the dollar now.

At that kind of level, you would expect fatigued Lloyds and RBS to do a deal. Then DW can get on with the serious stuff.

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