Dubai World may ask banks to take a so-called 20% "haircut" from the face values on their loans and stretch out loan maturities when it presents a restructuring plan this month.
The banks may be able to avoid the haircut if they allow the state-owned investment firm to stretch payments for as long as 10 years in return for a repayment guarantee from Dubai's government, JPMorgan Chase & Co (NYSE: JPM) said in a research report obtained by Bloomberg News.
The troubled conglomerate has called leading creditors to London for a series of meetings to discuss a suggested proposal for restructuring $26 billion of its debts. Bankers expect the one-on-one meetings to reveal the first details of a formal proposal, which the government has said should be finalized this month, the Financial Times reported.
Dubai World and its Nahheel PJSC and Limitless LLC property units used loans to finance palm tree-shaped islands and a map of the world off Dubai's coast as well as other real estate ventures which ran into difficulties when they tried to refinance amid the credit crisis.
Dubai called for a standstill request on Dubai World's debts in November, sparking a huge plunge in developing-nation stocks and a loan from Abu Dhabi, which was used to pay off a $4.1 billion Islamic bond by Nakheel in December.
When the Dubai bubble popped it left in its wake a string of banks facing billion dollar losses, especially in the U.K. Among the biggest losers are U.K. banks HSBC Holdings PLC (NYSE ADR: HBC), Royal Bank of Scotland Group PLC (NYSE ADR: RBS) and Lloyds Banking Group PLC.
HSBC reported $1 billion in charges from the region last week, much of it due to bad debt in Dubai. In the United States, Citigroup Inc. (NYSE: C) has $1.9 billion invested in Dubai World. Money manager BlackRock Inc. (NYSE: BLK) also is known to have exposure.
Swiss banking giant UBS AG (NYSE: UBS) estimates that non-performing loans in the United Arab Emirates, of which Dubai is a member, are currently running at 10% and 12% at Standard Chartered PLC and HSBC respectively. The bank expects non-performing loans in the UAE to reach mid-teens within five years, according to The Wall Street Journal.
But the list of investors facing huge losses is not limited to banks and hedge funds.
All totaled, the emirate may have accumulated over $100 billion of debt during the boom years. Since the bottom fell out in 2008, Dubai real-estate prices have plunged 50% from their peak and shares traded on the Dubai Financial Market have lost two thirds of their value. The stock market could take another 10 years to return to peak levels, Saud Masud, head of Middle East research at UBS told The Journal.
The debt debacle has left international companies with investments in Dubai pessimistic about its future. Business confidence in the emirate was down 30 points in the fourth quarter of last year, according to a survey by HSBC, The Journal reported.
While extending loan maturities may be good for Dubai World, some bankers in the region are concerned that the lenders will balk at the length of time they will be asked to wait for repayment.
"It shouldn't be so long that the banks are not very supportive," Union of Arab Banks Chairman Adnan Yousif told Bloomberg. Loan maturities shouldn't be extended by more than eight years, Yousif said, who is also chief executive officer of the Bahrain-based Albaraka Banking Group BSC.
The restructuring also is expected to involve an injection of fresh funds, but creditors may disagree how that money should be applied. Some are concerned that the proposals could lead to a split among the creditor groups – further complicating the process.
The big international lenders may want to lay claim to the new funds, but local lenders with ties to local suppliers may prefer that the funds go first to Nakheel and Limitless, Dubai World's developer subsidiaries.
"There is a choice of where the money goes in," a person close to the talks told the FT. "Creditors of Nakheel are suppliers and local builders that in turn have borrowed from local banks. If they don't get repaid there could be a multiplier effect."
The interest of lenders is represented by a steering committee of banks that have been in talks with Dubai's Department of Finance and Dubai World. The committee includes Royal Bank of Scotland, Standard Chartered, HSBC, Lloyds, two UAE banks and the Bank of Tokyo Mitsubishi UFJ LTD (NYSE ADR: MTU), the FT reported.
News & Related Story Links:
JPMorgan Sees Haircut, Extension on Dubai World Debt
- Financial Times:
Dubai World debt proposals expected
- Money Morning:
$10 Billion Bailout Just Beginning of Dubai's Debt Problems
- Money Morning:
Dubai Debt Fiasco Could Weigh on U.S. Banks
- The Wall Street Journal:
Debt Deal Won't Undo Dubai Damage
Dubai World Extension Shouldn't Exceed Eight Years