Wednesday, 17 March 2010

Dubai World’s Resolution May Not Be as Bad as We Thought



We are still awaiting a formal announcement from the government of Dubai regarding the restructuring of the USD26 billion of debt. As we get closer to the announcement date, the market seems to be recovering. Given that GCC markets tend to be leaky, the news flow suggests good news.
The plans were informally discussed with the creditor’s representatives, in which they were offered different prepayment proposals, none of which will have a “haircut” (reduction in principal payment). However, all will have no or low interest. The proposals includes a full repayment of principal within five years without any interest; repayment within seven years with 2% interest payment; or repayment within at least eight years with an interest of close to the 1 year Libor. The final proposal needs to be approved by the Dubai government.
Looking at the CDS (Credit Default Swaps) chart below, investors seem to be relatively happy compared to a month ago (Dubai World to Restructure its Debts). The news on receiving the full principal payment decreased the CDS spreads by 200bps and tightened the yields of some Dubai Inc. papers. Although these are good news, it remains that forgoing interest payments will affect the future cash flows of banks.
“Receiving 100 per cent of the principal and zero per cent interest is better than taking a 30 to 40 per cent haircut. On this basis, the banks involved will not have to incur a loss other than the time value of money which is not insignificant but may be better than the alternative,” said Jawad Ali, the managing partner of the Middle East offices of the law firm of King and Spalding. (TheNational)
If the 97 creditors do not agree on a deal, Dubai World may start the bankruptcy procedures.



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