Dubai Drives Hard Bargain for Banks - WSJ.com
For Dubai World's creditors, indignity piles upon indignity. News that the troubled state-controlled conglomerate plans to repay its lenders a meager 60 cents for every U.S. dollar they are owed is yet another blow for lenders who, until four months ago, assumed Dubai World's debts came with an implicit sovereign guarantee.
Dubai World is seeking to reschedule $22 billion of debt. But while the banks may be furious, they have such a weak negotiating hand that they may have to settle for little more than what is on the table. True, the offer doesn't look too bad at first glance. But the banks will receive payment only after seven years and will get no interim coupon, a much bigger "haircut" than they had expected. An alternative offer, that creditors receive payment in full after seven years but receive no government guarantee and accept 40% in the form of assets in Dubai World's most troubled business unit, Nakheel, is no alternative at all, given the near impossibility of valuing Nakheel's island developments.
But creditors, among them HSBC Holdings, Royal Bank of Scotland Group and Standard Chartered, are short of options. A tribunal set up to handle claims against Dubai World is untried, and many creditors lack confidence in the existing legal framework to arbitrate or enforce a settlement, let alone, in the worst-case scenario, seize the company's assets.
Meanwhile, appeals to Dubai not to jeopardize its reputation with investors likely are to fall on deaf ears. Abu Dhabi, which already has pumped $20 billion indirectly into Dubai, is calling the shots now. And now that Dubai has the support of the world's fifth-largest holder of oil reserves and the Middle East's largest sovereign-wealth fund, it may be less concerned over its standing with international banks than maintaining the support of its neighbor.
Of course, the banks could take the nuclear option and reject a deal, forcing Dubai to either default, or once again go cap in hand to its oil-rich cousins in Abu Dhabi for more support, but this comes with a multitude of risks. Many creditors have a substantial presence in the United Arab Emirates. Dubai's rulers could make operating in the emirate tough for any bank that tries to play hardball.
The banks may be seething, but this is one indignity they may choose to suffer in silence.END
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