Wall St. WTF: Here's the plan: we liquidate Dubai World in slow motion and hand out the money starting to my left, if the creditors agree they can sit between us...

Last week there were some seemingly minor developments in the Dubai World saga. These were the Nakheel restructuring plan and the presentation of the Dubai World restructuring plan to the general lending community outside the Lenders Committee which had blessed the proposal back in May. On the surface of it this presentation carries with it no new news, the proposal is more or less identical to what the big lenders agreed.

I’ve written about this before at length, but to summarize, the lenders will be asked to roll their loans out into tranches of five and eight years. There will be no haircut on principal but the interest rates will be cut to 1% on the 5 year tranche and between 1-3.5% on the eight year tranche. Apparently the 8 year tranche will have several choices for the lenders on repayment type and the degree to which there is a “shortfall guarantee.” Presumably the more risk the lender takes the higher the rate. It seems kind of a Hobson’s Choice to me because even 3.5% is substantially below a market price for that risk and the word is that there is some question as to whether the guarantees would be enforceable in UK courts.

So what is different about this announcement than the one that was made in May? Well, several things. One is that the lenders are not in a position to negotiate the terms, it is a take it or leave it deal. The big banks had an opportunity to challenge Dubai on the nature and structure of the deal back in May but they were more concerned about not taking too big an immediate loss. They successfully blocked Dubai’s opening gambit of a partial write down of principal but conceded on the structure of the deal and on concessionary interest rates. By doing this they basically enabled the government of Dubai to drain the DFSF, channel the vast majority of the funds to Nakheel, and through Nakheel to the Sukuk holders and the local contractors which had trade claims against Nakheel. The Nakheel creditors, who are also mostly local are getting a much better deal than the creditors of the parent company. Well that’s what happens when you put immediate loss avoidance ahead of your long term strategic interests but considering that this decision was made by western banks it should come as no surprise.