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Dubai entities tread cautiously on reworking debt

There were a number of reasons for Dubai’s financial crisis of 2008. Admittedly, the last straw was the request by Dubai World to creditors that they agree to freeze debt repayment for six months.

The announcement sprang a surprise and rattled credit markets as the prospect of default put banks that lent money to the Dubai government-owned entity at great risk on one hand and raised the spectre of a fire sale of the emirate’s most pricey assets, on the other.

How Dubai coped with the problem is now part of contemporary history. The Dubai credit swap rates which had peaked in 2008 have since come down to the lowest levels and many of the activities that preceded the crisis are back to near normal situation.

But as comfort levels for businesses improve and precaution slowly gives way to a sense of reassurance bordering on complacency, a certain new complexity has been introduced by a couple of entities asking for another repayment freeze.

According to insights provided by Debtwire, an intelligence service that reports on corporate debt situations before credit ratings are downgraded, Limitless, a major government-related entity in the Dubai Inc., has approached lenders with a waiver request for the first amortisation payment of $400 million (Dh1.5 billion) due in December 2014 under its 2012 debt restructuring agreement of a $1.2 billion loan. This is the first of three equal annual tranches beginning with December 2014.

According to Debtwire, Limitless has been forced to ask for the deferment as an asset disposal plan has failed to materialise as scheduled. The government entity is reportedly offering a small pre-payment in exchange for the approval to push back amortisation by another 12 months.

Slow progress on asset sales

Similarly, slow progress on asset sales has prompted Dubai World to request proposals to manage $4.4 billion in loans maturing in March 2015 and reorganise its $10 billion repayment due in March 2018. There is an annual creditor meeting coming up next month, which is expected to clarify the situation further.

These developments will certainly have an impact on Dubai’s new credit standings, but in no case is its extent expected to be as dramatic as it was with the first deferment request.

BofA Merrill Lynch analysts have on their part expressed concern that Dubai’s restructuring of debt beyond 2015 is going to be challenging. Although they still expect Dubai to scrape through, they consider the refinancing strategy to be vulnerable, especially if there are dislocations to global funding markets or in the event of shocks to growth.

Merrill Lynch feels that the systemic nature, size and visibility of the Dubai World debt maturities are likely to prove a litmus test for the emirate’s finance managers. If they succeed to use the backdrop of improved domestic economy and the higher liquidities in the banking sector to negotiate the delicate first turn that lies ahead in 2015, there is a possibility of credit swap rates compressing further; otherwise, things could become more difficult. The fact that much of the credit risk has already been re-priced introduces another difficulty level to the game.

The way out of the debt overhang, according to Merrill Lynch, might involve a combination of internal cash generation, asset sales and refinancing. But it puts forth certain pre-conditions for this to happen: decent global outlook and liquidity and potential support from Abu Dhabi. The latest information on this front suggests the requisite support from Abu Dhabi being assured.

In any case, the results are not expected to be as acute as they were with the first request for deferment of repayment by Dubai World. The shock element of the risk of default may be largely absent in the new round as the market may have already factored in all possibilities in the context of continuing debt re-rolling and renegotiation of deals under more favourable terms wherever possible.

Similarly, distress sale of assets is no longer considered an essential component of the solution.

— The writer is a Dubai-based journalist.