Lack of final agreement on Dubai World debt worries bankers

Posted on 23 May 2010 with 2 comments from readers

Around 250 bankers from around the region will convene for the inaugural Middle East North Africa and South Asia Forum in the Dubai International Financial Centre today. The event kicks off with a dinner and inaugural address tonight and then there is a full day conference tomorrow.

Last week’s announcement on an agreement in principle for the rescheduling of $23.5 billion of Dubai World debt by 60 per cent of lenders seems at least in part to have been aimed squarely at this audience. It was not the full and final settlement once promised at this time.

Indeed, 66 banks have yet to agree. The problem for the local UAE banks is the interest rate that is low in comparison with the higher than dollar rates available on dirham deposits locally.

Summer just too hot

Some reports have said a full agreement will be signed within a week or so, but Gulf News slipped in ‘a few months’. This is probably far more realistic in view of the number of banks involved and the local proclivities for taking long summer holidays during the hot season. A post-Ramadan announcement might actually be the outcome but this is only speculation.

However, the head of the UAE contractors’ accociation was quoted by Reuters as saying a final deal between the contractors and Dubai World real estate subsidiary Nakheel is expected within two weeks.

Trade creditors have been offered full repayment with 40 per cent in cash and 60 per cent in the form of an Islamic bond with a 10 per cent annual profit. Apparently 50 per cent of contractors have agreed to these terms and that is 15 per cent short of the 65 per cent required to seal the deal.

So bankers meeting in Dubai today are still a little worried about the Dubai World debt situation. A deal is not a deal until it is signed off, and with so many parties involved things can still go wrong. It is uncertain, for example, how another rough patch in global financial markets would affect these ongoing negotiations.

Then again bankers are still nervous about the total outstanding debts of Dubai. These relate to real estate and other commercial interests and are not strictly speaking sovereign debts of the kind plaguing Greece, for example. And importantly Abu Dhabi has also shown itself the UAE lender of last resort through its recent $20 billion rescue package for Dubai.

How much debt?

But the actual debt falling due in 2011 is higher than 2010 at $24.6 billion, according to Gulf Business magazine, and there is another $30 billion to repay by the end of 2014. And this is only the syndicated borrowing. Bilateral bank loans take the total estimated debt well north of $100 billion, and possibly much higher.

Bankers clearly want to know where they stand, and any greater transparency on the numbers would be welcome, even if it initially alarmed the local financial markets again.

At the Menasa Forum bankers will undoubtedly be regailed with information about the commercial strength of Dubai as a regional trading, transportation, tourism and logistics hub. There is indeed an excellent cash flow from these operations but how much debt it can support, and on what terms is the big issue for bankers going forward.