(Bloomberg) Dubai World said it began "constructive" talks with banks to restructure $26 billion of debt, including liabilities owed by units Nakheel World and Limitless World.
Debt from subsidiaries such as Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations because those companies "are on a stable financial footing," Dubai World, one of the emirate's three main state-related holding companies, said in a statement.
The company is seeking to delay payments on less than half its $59 billion of obligations, damping concern that a potential default may set back the global financial system's recovery from the credit crisis. Stocks erased losses in the U.S. after the Dubai World statement, sending the Standard & Poor's 500 Index up 0.4 percent.
"Now that they're saying $26 billion, it reduces some of the panic that built up in the last few days," said Nick Chamie, an analyst at RBC Capital Markets in Toronto. "This is positive. The market was feeding on its own concern and there were talks of $60 billion debt that would need to be restructured."
The cost of protecting against a default by Dubai fell yesterday for the first time in a week. The country's credit-default swaps declined 75 basis points to 571 basis points, according to prices from CMA Datavision. Default swaps, which fall as the perception of credit quality improves, for Abu Dhabi narrowed 34 basis points to 144 and contracts linked to DP World Ltd. dropped 109 basis points to 631. A basis point equals 0.01 percentage point.
Dubai shares tumbled and Abu Dhabi's stock index dropped the most in at least eight years yesterday on the first trading day since the government announced state-run Dubai World may delay debt payments. The Dubai Financial Market General Index dropped 7.3 percent to 1,940.36, the biggest decline since October 2008. Abu Dhabi's ADX Index fell 8.3 percent, the most since Bloomberg began compiling the data in 2001.
The Nov. 25 announcement triggered the biggest stock market slump in three months in Asia and Europe's worst rout since April as the debt request risked adding to the $1.7 trillion of losses and writedowns suffered by banks in the global crisis.
The $26 billion figure "confirms that it's a relatively minor problem," said Michael Atkin, who helps oversee $10 billion in fixed-income assets as head of sovereign research at Putnam Investments in Boston. The country's struggles serve as a "reminder that we're not yet out of the woods in the global financial system. It raises the issue of what else is out there," he said.
Royal Bank of Scotland Group Plc was the biggest underwriter of Dubai World loans while HSBC Holdings Plc has the most at risk in the U.A.E., according to JPMorgan Chase & Co.
Banks have begun negotiating with Dubai World because they "are wary of any alternative including calling Dubai World in default," said Hani Sabra, associate covering the Middle East for New York-based research firm Eurasia Group.
Spokespeople for RBS and HSBC declined to comment.
The United Arab Emirates' central bank said Nov. 29 it "stands behind" the country's local and foreign banks and offered them access to more money under a new facility. U.A.E. Central Bank Governor Sultan Al-Suwaidi told Abu Dhabi TV yesterday there was "no need to worry" about lenders in the Persian Gulf nation.
The amount of obligations Dubai World plans to restructure includes about $6 billion of Islamic bonds sold by Nakheel, according to the statement. The debt, known as sukuk, is governed by sharia laws barring investors from profiting from the exchange of money.
"Initial discussions have commenced with the banks of Dubai World and are proceeding on a constructive basis," Dubai World said in the statement. "It is envisaged the restructuring process will be carried out in an equitable way for the overall benefit of all stakeholders."
The Dubai government said Nov. 25 its Financial Support Fund will spearhead the restructuring of state-owned Dubai World and named Aidan Birkett of Deloitte LLP as its chief restructuring officer. The government said Dubai World would seek an extension of loan maturities until at least May 30, 2010. More than 75 percent consent from creditors is needed to approve extraordinary resolutions.
Bondholders of Nakheel PJSC, Dubai World's property unit whose $3.52 billion Islamic bond is due Dec. 14, formed a creditor group that represents more than 25 percent of that debt, according to Jo Shepherd, head of public relations at Ashurst LLC, which was appointed legal adviser. The group is considering its options, Shepherd said.
"Even though it is going to be tough to restructure $26 billion of debt, Dubai World's creditors have an incentive to do so in order to reduce the haircut that they will have to take," said Rachel Ziemba, a senior analyst covering sovereign wealth funds at Roubini Global Economics, a New York-based research firm. "Time is short but they might still avoid defaulting on Nakheel's $3.5 billion bonds due on Dec. 14."
Nakheel's 3.17 percent Islamic bonds due in two weeks dropped to 58 cents on the dollar yesterday from 110.5 cents on Nov. 23, according to Citigroup Inc. The debt traded as low as 42 cents on the dollar on Nov. 27.
Dubai's government told creditors of Dubai World yesterday that they should help in a restructuring the holding company because it hasn't guaranteed the debt.
"The lenders should bear part of the responsibility," the director general of the emirate's finance department, Abdulrahman Al Saleh, said on state-run Dubai TV. The government's Nov. 25 decision to seek a halt Dubai World's debt payments is "in the interest of all parties, the investors the creditors and the contractors," he said.
Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund a boom in growth and diversify the economy. The global financial turmoil and a decline in property prices hurt companies such as Dubai World as they struggled to raise loans.
The company received financing based on the "viability of its projects, not on government guarantees," Al Saleh said.
Home prices in Dubai plummeted 47 percent in the second quarter from a year ago, the steepest drop of any market, according to Knight Frank LLC. Property prices may drop further, a survey by Colliers International showed Oct. 14.
Istithmar World, Dubai World's investment unit, bought New York luxury retailer Barneys in 2007 for $942.3 million. Dubai World agreed in 2008 to invest about $5.1 billion in U.S. casino company MGM Mirage as part of a plan to diversify the emirate's economy into entertainment and financial services.
Dubai, home to the world's tallest tower, set up a $20 billion Dubai Financial Support Fund after the seizure in credit markets. Dubai said Nov. 25 it borrowed $5 billion from Abu Dhabi government-controlled banks for the fund, after raising $10 billion by selling bonds to the U.A.E. central bank in February.
Dubai's government raised $1.93 billion in October from the biggest sale of Islamic bonds from the Gulf Arab region this year, and paid off a $1 billion Dubai Civil Aviation Authority sukuk due Nov. 4. The sheikhdom and its state-owned companies have to repay $9.2 billion of bonds and loans maturing in 2010, $19.8 billion in 2011 and $17.3 billion in the following year, Deutsche Bank AG said in report in August.
Istithmar World breached the covenants on 895 million pounds ($1.5 billion) of loans backed by London's Adelphi office building, the issuer said in a statement.
Moody's and Standard & Poor's cut their ratings on Dubai state companies, saying they may consider Dubai World's plan to delay payments a default.
"The times of implicit support are clearly over," said Philipp Lotter, vice-president of Moody's Investors Service in Dubai. "In the past, entities such as Dubai World certainly represented themselves as quasi-government entities, whereas there was no legal obligation on behalf of the government to support, and that has certainly shifted with last week's announcement."