UAE finance: Holding pattern

FROM THE ECONOMIST INTELLIGENCE UNIT

Creditors of Dubai International Capital (DIC), the private equity arm of Dubai Holding, have been asked to accept a three-month delay in the repayment of a US$1.25bn syndicated loan so as to allow time for it to strengthen its financial position, presumably through selling assets. The request came as little surprise, as it has been evident for some time that Dubai Holding, which is directly owned by the ruler, Sheikh Mohammed bin Rashid al-Maktoum, would face difficulty in servicing some of its debts, albeit not to the same extent as Dubai World, which is in the final stages of agreeing a US$23.5bn restructuring deal.

According to a tally published by the IMF in its Article IV report earlier this year, Dubai Holding accounts for US$14.8bn out of the total debt of US$109bn owed by the government of Dubai and its related entities (the overall debt has been augmented by the US$20bn advanced to the government by Abu Dhabi and the UAE Central Bank to help deal with the Dubai World crisis). DIC is one of three divisions of Dubai Holding, and has total debt estimated at about US$2.6bn. The other division are Dubai Group, which specialises in financial services and holds an estimated US$1.1bn in debts, and Dubai Holding Commercial Operations Group (DHCOG), which holds the property and hotels portfolio and accounts for most of the remainder of the debt.

DIC’s US$1.25bn loan falls due at the end of June. The company, advised by Lazards, is looking to extend this to end-September, and is said to have received a favourable response from a committee of leading creditor banks, including HSBC, Lloyds and Royal Bank of Scotland, as well as Emirates NBD (which is part-owned by the government’s Investment Corporation of Dubai; ICD) and Noor Islamic Bank (25% owned by Dubai Group and 25% by ICD). DIC said that the extension would enable it to “maximise the value of its business for the benefit of all of its stakeholders”. This suggests that it is considering the sale of some its assets to raise cash to meet its debt obligations—even though valuations are not likely to be very attractive.

Almatis cloud

According to DIC’s most recent annual report, for 2008, it had six core private equity holdings in Europe with a total enterprise value at that time of €5bn (US$6.2bn at today’s exchange rate). These include Almatis, a Netherlands-based alumina producer that filed for Chapter 11 bankruptcy in the US at the end of April, as part of a plan by a group of creditors led by Oaktree Capital Management to take over the company. This plan would in effect mean DIC losing its equity stake, and the Dubai firm is challenging it in the courts. A hearing is scheduled for July 19th. The original buyout of Almatis took place at the end of 2007 in a deal worth US$1.2bn, according to the DIC annual report. Another company in the European portfolio is Merlin Entertainments, whose attractions include Legoland and the London Eye. DIC acquired 17.5% of Merlin in 2007 in exchange for the sale of Madam Tussauds to the group. It emerged in February this year that DIC had sold down its stake to about 6% during 2009 to the Danish family that founded Lego. The other four European assets of DIC are Travelodge (UK hotels), Doncasters (UK; precision instruments), Alliance Medical (UK; healthcare) and Mauser (Germany; industrial packaging)

In addition, DIC has a cluster of Middle East assets, including Rivoli, an upmarket retailer, and stakes in Jordan’s largest investment fund and in a regional infrastructure fund. It has also taken minority stakes in a number of major international firms, notably EADS, Sony, India’s ICICI Bank and Oger Telecom, a Saudi Arabian firm with operations in Turkey and South Africa. There have been reports that some of these minority stakes have been sold over the past few months, but DIC thus far not published any information on this.

With respect to the other divisions of Dubai Holding, the most notable recent developments have been the sale of part of Dubai Group’s stake in EFG-Hermes, an Egyptian investment bank, in December for an estimated US$120m and the collapse of a plan to merge Dubai Holding’s real estate firms—Dubai Properties, Sama Dubai and Tatweer—with Emaar Properties, the emirate’s large property company, which is partly owned by ICD.

Assuming that DIC manages an orderly settlement of its debt obligations in agreement with its creditor banks, the focus is likely to shift to DHCOG, which recently postponed, for the second time, the publication of its annual results for 2009—they are now expected on May 31st. The trading of its sukuk, listed on Nasdaq Dubai was halted pending the annual report. The company, commenting on the delay, cited “the complexities in consolidating the results of its units”. It has been reported that DHCOG is seeking to roll over of its credit facilities coming due in July and is currently negotiating commercial terms with its creditor banks.

Dubai World deal almost done

Meanwhile, Dubai World (DW) has reached an agreement with the co-ordinating committee  on the terms of the restructuring of US$23.5bn of its debts. The committee represents the seven main bank lenders to DW, accounting for 60% of the total amount owed to banks. The conglomerate proposed to pay a total of US$14.4bn accounting for 100% of principal due, but through extended maturity periods and with substantially reduced interest rates. In addition, the Dubai government will convert US$8.9bn of its loans to DW into equity in the company.

The restructuring proposal, which differs only slightly from the offer tabled in March, gives creditors various options on interest rates and principal repayment depending on whether they hold debt denominated in dollars or UAE dirhams, and whether their loans are secured or not. The deal offers lenders a 1% interest rate on the loans restructured to mature in five years, the total of which amounts to US$4.4bn. The holders of debt with eight-year maturity, which adds up to US$10bn, will have three options with a minimum 1% interest rate and varying additional rates of 1.5% to 2.5%, paid at maturity.  The final repayment carries an explicit guarantee of the Dubai government. Creditors holding claims in UAE dirhams, which include some international banks, will be compensated for the difference in borrowing costs based on Eibor and Libor, up to an additional 1%. Banks holding dollar-denominated liabilities will also have an option to get a share of profit from DW’s asset sales, which may amount to US$1bn. As part of the agreement, the Dubai government offered bank creditors settling for eight-year maturities a shortfall guarantee in case the proceeds from sales of the conglomerate’s assets are insufficient to cover the debt to be repaid.

The DW debt saga may take several months to conclude as the settlement will now be taken to the remaining 66 lenders for the final sign off. Despite commercially unattractive terms for the majority of lenders, the deal is expected to be accepted and is widely regarded as the first step towards restoring the emirate’s solvency. To validate the restructuring settlement, 66% of all creditors have to accept it but DW representatives are hoping for a consensual resolution. If agreement is not reached, DW will have to file a case with the special tribunal, established by a decree issued by Sheikh Mohammed bin Rashid last year for disputes linked to the government-owned DW and its subsidiaries.

Nakheel recovery plan takes shape

Simultaneous to the restructuring negotiations on DW debt, Nakheel, the property arm of the conglomerate, has conducted its own talks with creditors, mainly contractors and suppliers. Nakheel’s total obligations that are subject to restructuring are estimated at US$10.5bn.

In return for extending maturities of Nakheel’s debt, the creditors are being offered commercial interest rates. Nakheel’s sukuk (Islamic bond) holders will receive full payment on their bonds. Under the restructuring plan, trade creditors are offered 100% percent recovery on agreed claims, with 40% cash payment and the remaining 60% in 5-year publicly tradable sukuk, paying 10% in interest annually. Half the trade creditors have accepted the agreement but Nakheel is still 15% short of the required take-up for the offer. As soon as the 65% acceptance rate is reached, the funds will be disbursed.