Lenders question Dubai's shortfall guarantees
Dubai, July 27, 2010
Dubai's pledge to cover gaps in Dubai World's debt repayment plan has become a sticking point for lenders, some of whom want state guarantees to fall under British - not local - law, bankers close to the matter said.
The issue arose at Dubai World's all-creditor meeting on July 22, creating another hurdle as the group seeks to push through restructuring proposals.
At stake are Dubai's shortfall guarantees to plug any gap left after asset sales to fund the conglomerate's plan to repay $14.4 billion in bank debt.
Depending on which options lenders choose in the second tranche of Dubai's debt plan, the government's shortfall guarantee could cover up to $4 billion.
'If it's under Dubai law, many will find it difficult to participate,' said a banker at an international lender, who asked not to be identified.
He added that bankers at the meeting said they would be more comfortable having guarantees fall under established UK laws.
The indebted conglomerate put its plan, already approved by its core creditor group, to the rest of its lenders last week.
It indicated it was ready to use a special tribunal to force any rebel lenders back into line if they balk at the terms.
Skittish after Dubai made clear it was not responsible for Dubai World's debt in the wake of its shock debt delay announcement last year, bankers said worries about how any shortfall promises would be enforced were high.
Lenders have until September 9 to reach a decision about the restructuring proposal, sources said. But the banker said that the issue was important enough that some lenders could risk a delay of the process in order to get a resolution.
'There's no comfort right now from having a Dubai guarantee, especially among international banks,' said a Gulf-based banker who also attended the meeting.
'When enforceability becomes suspect, banks become resistant,' he said.
The government operates under Dubai law and will not allow itself to be brought under any other jurisdiction - a position outlined by Dubai World representatives at the meeting, sources in attendance said. A Dubai government spokeswoman declined comment.
Dubai's ruler, Sheikh Mohammed bin Rashid al Maktoum, set up a special tribunal to be the final arbiter in disputes over Dubai World. The restructuring plan comes under its auspices.
The shortfall guarantee, however, depends on the government's word that it will pay. In the aftermath of its debt debacle, Dubai will be loathe to risk the reputational damage from reneging on its guarantees.
But banks have a shortage of confidence and want some guarantee on enforceability - and somewhere other than Dubai's untested court system. 'Under Dubai laws, the government can change the laws on a whim,' said the Gulf-based banker.
'English laws aren't going to change. The core group of Dubai World lenders has agreed to reschedule repayment of loans due in the next few years into a five- to eight-year package paid at between 1 and 3.5 per cent.
The seven-member coordinating committee of banks comprises HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered, Bank of Tokyo Mitsubishi, and local lenders Emirates NBD and Abu Dhabi Commercial Bank.-Reuters