Dubai World Plans Debt Restructuring With $9.5 Billion Government Infusion

The Dubai government today (Thursday) announced plans to inject about $9.5 billion into state-owned holding company Dubai World to restructure its debt.

The additional funds double to $20 billion the amount the government will pay to the emirate's holding company. Dubai World is seeking to renegotiate $23.5 billion in debt with creditors. The company said it owed $14.2 billion to lenders other than the government at the end of 2009. The government asked creditors to wait eight years to get all their money back.

Dubai World, and its real-estate development arms, in November shocked investors when it announced it would seek to delay repaying its debt until May. The announcement sent developing-nation stocks plummeting and doubled the cost of buying insurance against a default.

Dubai, the second largest of seven states that make up the United Arab Emirates, and its state-owned companies ran up $80 billion in debt through 2008 to transform the sheikhdom into a tourism, trade and financial hub.

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. These, as well as other real estate ventures, ran into difficulties when they tried to refinance amid the credit crisis.

The new plan raises hopes of revitalizing Dubai's failing real estate industry. The financial crisis and years of overbuilding wiped out 50% of the value of Dubai property last year.

Reaction to the capital infusion was mostly positive. The new plan, including the payment-in-full offer, comes as a relief to its creditors after Dubai earlier this month announced that investors might be asked to take a 20% reduction in the face value of their loans.

Shares of Dubai's benchmark stock index jumped the most in three months after the government announcement, and the cost of insuring against a default by the emirate dropped.

"This is certainly a step in the right direction toward resolving Dubai's structural issues," Ali Taqi, portfolio manager at A/T Capital Management in Dubai, told Bloomberg News. The "eventual impact on the Dubai economy is going to be positive as contractors are paid and incomplete projects get back on track."

When the Dubai bubble popped it left in its wake a string of banks facing billion dollar losses, especially in the United Kingdom. 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.

Dubai World officials spent Wednesday locked in a five-hour meeting with the banks, which are representing more than 90 creditors in all, according to a report in The Wall Street Journal.

The restructuring deal that has taken months to draw up involves Dubai World issuing two tranches of new debt and converting $8.9 billion, or 38%, of its existing obligations into equity.

Aidan Birkett, Dubai World's chief restructuring officer, told The Journal that banks have given a positive response so far to the plan to repay up its debt, adding that "it's a very attractive deal for creditors."

Others are taking a wait-and-see approach.

"It reduces the uncertainty, but there are still a lot of unanswered questions," Ziad Makhzoumi, chief financial officer of Arabtec Holding, a major Dubai World creditor, told Zawya Dow Jones immediately after the announcement. "We don't know the exact details. We need more detail on the mechanism of the plan and the timing. It will take some time for the money to come through."

Of the $9.5 billion infusion announced today, the lion's share - $8 billion - will go toward full repayment of bonds belonging to Nakheel, Dubai World's property development arm.

Birkett added that Dubai World would not be forced to sell its assets at fire-sale prices to settle its debts.

Those assets are estimated to be worth more than $100 billion, according to the firm's 2008 financial report. They include ports manager P&O, luxury Madison Avenue retailer Barneys, holdings in Canadian circus troupe Cirque du Soleil and the Queen Elizabeth II cruise liner.

In 2007, Dubai World joined up with MGM Mirage (NYSE: MGM) in Las Vegas's $8.8 billion CityCenter casino development.

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