closing the books on the Dubai World debt restructuring

At a time when investors around the globe seem to be in panic mode, it’s nice to know that at least one mini-crisis has been resolved.

the Dubai World crisis

Last week, with little fanfare, Dubai World and its creditors reached an agreement on restructuring the company’s finances.  As you probably recall, the crisis was touched off by Dubai World’s unilateral announcement, issued on the eve of religious and secular holidays that would keep many of the parties involved away from their desks until the following week, that it would be unable to pay at least some of its obligations on time.   It therefore wanted to restructure everything–about $25 billion.

Complicating the issue was the fact that these obligations were a mixture of western-style bank debt and publicly traded sukuk, a  form of sharia-compliant Islamic finance.  In the case of the latter, some parties seemed to think that a dispute over failure to repay was an issue for English courts, others that it was one for sharia compliance boards–an ambiguity brushed under the rug in the bull-market enthusiasm to get the instruments sold.  Given that we have only been seeing over the past couple of years the first high-profile cases of sukuk “default,” there were no precedents to say what sharia authority would decide the case or administratively how it would proceed.

On top of all that, creditors believed that the obligations were guaranteed by the Dubai government, although as far as I can tell none of the documents for the bank loans or sukuk issues specified this.  Investors also took the Dubai World announcement as a signal that the entire $100 billion+ that emirate entities owe would eventually need to be restructured as well.

What a mess!

the outcome

Abu Dhabi lent Dubai $10 billion, which Dubai then relent to Dubai World.  DW used these funds to pay off maturing sukuk. Dubai subsequently converted the loan into equity.

Last week, bank creditors agreed to convert their existing $14 billion in loans into new 5-8 year (i.e., longer) maturity obligations at lower interest rates.  The new loans also carry an explicit sovereign guarantee.  Although the present value of these loans is likely substantially less than that of the previous ones, the form of the agreement is in harmony with sharia guidelines on risk-sharing and repayment of the nominal amount of the original obligation.

After a bad start last November, the Dubai World saga seems to have worked out as well as could have been expected–and certainly far better than pessimists had feared.

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