Stock markets tumbled and bankers turned glum following a report that Dubai World DBWLD.UL was mulling offering creditors two options, neither one reassuring to investors already spooked by Dubai's debt debacle.
According to the report, Dubai World will offer creditors either 60 percent repayment over seven years and a government guarantee, or full repayment with a debt for equity swap for property assets of Nakheel and no guarantee.
Neither option is palatable to bankers and the government was quick to distance itself from the report by Dow Jones.
"If anything is a surprise, it's in the figures," said a banker at a large international bank. "I thought they would have proposed a little better than 60 percent. This doesn't look promising."
Aside from the steep 40 percent haircut, creditors are unlikely to welcome getting assets in Nakheel NAKHD.UL, the developer behind man-made islands shaped like palms and a map of the world.
Nakheel had net tangible assets of 73.7 billion UAE dirhams ($20.07 billion) as of June 30, with properties under construction, including land, valued at 112.8 billion dirhams, according to Mac Capital Advisors.
"This gives an indication of what they're thinking -- they're considering some sort of discount," said one Gulf-based banker who asked not to be identified.
"It implies the government could have senior position, which the banks may not want to accept. And if it (the deal) doesn't guarantee interest payments, it's not a great deal for the banks."
The government reiterated last week that financial aid to Dubai World, through the Dubai Financial Support Fund (DFSF), was being delivered on commercial terms.
IN DENIAL
Dubai World rocked global markets in November with plans to request a delay on repaying $26 billion in debt linked to its main property units Nakheel and Limitless World. It staved off default on a $4.1 billion Islamic bond linked to Nakheel, after a last minute bailout from Abu Dhabi.
Criticized for its lack of transparency, Dubai said on Sunday it had made no formal restructuring proposals and nothing was expected until March or April.
"Although today's restructuring rumors have been denied by Dubai authorities, the risk of a deep haircut and extension of maturities still remains high -- given the combined solvency and liquidity problems facing Dubai World and a number of its subsidiaries, including Nakheel," said Goldman Sachs in a note to clients.
Dubai's main index .DFMGI fell to its lowest level in three weeks on Sunday in response to the news report, closing 3.5 percent lower.
"The stock market's reaction (today) reflects how bankers have interpreted this," said a senior Abu Dhabi based banker, adding that no official announcement has been made to the bank's representatives at creditor meetings with Dubai World.
The company is negotiating with an informal bank coordinating committee and has yet to make a formal proposal on how it plans to repay some $22 billion in debt.
The conglomerate is relying on the goodwill -- and self-interest -- of creditors to patiently wait for such details on how it plans to meet its obligations.
"It's a double-edged sword -- how much can Dubai World push down on UAE banks that hold this debt?" said Ali Khan, managing director and head of brokerage at Arqaam Capital.
"This will have wider implications, given the bank sector's weight on the stock market."
On Friday, the cost of insuring Dubai's debt soared to 2-1/2 month highs and bond yields rose as growing uncertainty over the fate of the debt-laden conglomerate World sent investors scrambling to hedge their exposure.
"I think it's for real, just gently priming the market," said an Asia-based banker at a major international bank.
"Tomorrow will be very interesting, when London and the U.S. are in."
[Reuters]
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