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Dubai World and creditors in rate ‘stand-off’

2010-04-18

Dubai World has met its leading creditors for the first time since it tabled a $23.5bn debt restructuring plan last month, according to people with knowledge of the talks. The talks, in Dubai this week, were to negotiate further the terms of the plan. While the company is proposing to reschedule its debts over five to eight years, while cutting the interest paid to 1 per cent per annum, its lenders want a change to the terms, the sources said. Some of the banks would like an increase in the interest rate and a reduction of the time over which they are repaid under the proposals. Some lenders are understood to want interest increased to 3 per cent over the London interbank rate. “There is a bit of a standoff,” said one source. While there was no formal rejection of the proposals, no agreement has yet been reached, the sources said.  The below-market interest rates offered could represent an effective loss of as much as 30 per cent over time. One of the problems for some bankers is that this impairment could potentially be treated differently by different banks.  “Depending on the bank’s cost of funds . . . some banks will take a 5 per cent haircut and some banks will take a 25 per cent haircut,” said one banker. “Nobody is worried about the principal repayment, but everyone is worried about accounting treatment, so everybody is going with a different approach to see how they can reduce this impairment.”  However, another person with knowledge of the talks said the “fundamentals” were not being negotiated.  Talks are expected to take several weeks before agreement is reached, according to one banker. While the meetings this week have involved a seven-bank co-coordinating committee, which includes HSBC, RBS, Standard Chartered and Lloyds, the consent of all 97 bank lenders is needed to approve the deal without using the new reorganization laws. If Dubai World can secure the agreement of a majority of creditors, the company can use a special tribunal to push the plan through with the support of 66.6 per cent of its lenders.  A spokesman for Dubai World declined to comment.  Last month, Dubai unveiled the long-awaited debt-restructuring plan, under which it would inject $9.5bn (€7bn, £6.2bn) into the conglomerate, with a large chunk going to its property developer, Nakheel. The proposals would extend maturities on bank loans and inject cash into the businesses, in the hope that the holding company could be transformed into a cash-generating enterprise in five to eight years. Nakheel’s 2010 and 2011 bonds will be paid in full, as long as the proposals are adopted by a majority of the stakeholders. As part of the proposal, the government funding would be subordinated so that it, in effect, became equity. This would lead to an eventual separation of Nakheel under the proposals, which could benefit Dubai World’s lenders as it would reduce their exposure to any intercompany claims, said one person with knowledge of the talks.


 

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