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 $4bn.
"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 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.
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.
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 one and 3.5 percent.
The seven-member co-ordinating 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.