DIC's new loan has fat fees, little pieces (Re-post)

MEED is reporting further details of Dubai International Capital's new 2-year, $550 million syndicated loan.

As I suspected when bankers divulged that the loan had been secured last week, the new money is designed to refinance $600 million in loans. Bankers had told The National that those loans weren't due until November. But according to MEED, DIC paid them with a bridge loan in August. The new $550 million loan refinances that bridge loan. MEED says DIC is paying 4 percentage points over Libor, or about 4.28 per cent. But banks are also being rewarded with fees of up to 3 percent of the deal, making the overall borrowing cost over 7 per cent. This may have negative implications for the pricing of Dubai's new bonds, which judging from Dubai CDS prices could be priced below 4 per cent. Given that Dubai is unrated, and that the uncertainty surrounding Dubai's use of its bailout funds, however, and lack of transparency from Dubai Inc. companies about their own restructuring, that rate may end up being much higher. If this were the case, however, it does stand to reason that the CDS spread would also be much higher.

When DIC borrowed the $600 million in October, 2006, it paid only 0.8 percentage points over Libor. Because Libor at the time was well over 5 per cent, DIC was paying roughly 5.8 per cent on those loans. Now it appears to have refinanced the loans at an even lower rate, provided you don't include the fees. Fees back then were reportedly no higher than 45 bps, so the overall cost of borrowing was 6.25 per cent. Some have suspected that companies have been convincing banks to offer them lower interest rates in return for heavily padded fees, which with fees now of 300 bps seems to be part of the DIC deal. DIC has therefore refinanced at a higher rate about a percentage point higher than its original 2006 financing.

What was the money for? Helping to pay 675 million pounds for Travelodge of the UK. That was the same year DIC bought Madame Tussaud's. It has since sold off part of Travelodge and all but 20 per cent of Tussaud's to Blackstone. Travelodge's expansion plans ran smack into the global recession, and DIC earlier this year had to inject 20 million pounds into Travelodge as part of a deal to refinance the hotel chain's own debt.

Now, according to MEED, DIC is offering to let banks lend as little as $15 million each of the $550 million in order to make the deal more digestible to more banks.