Dubai World (DW) needs to shut ailing businesses and reveal details of its debt restructuring agreement with creditors to prevent speculation and support performance in the long term, a Kuwait investment bank said on Tuesday.
Global Investment House (GIH) said it expected the agreement to restructure $24.9 billion debt reached between DW and more than 99 per cent of lenders early this month would boost confidence in the UAE economy.
“Debt restructuring needs to be complemented with methods to promote long-term corporate health in order to prevent restructuring in the future. Some of these methods include shutting down sick businesses, improving financial disclosure and auditing standards, and sale of bad assets,” GIH said in a study.
“Transparency, along with financial disclosure and corporate governance, need to meet international standards in order to allow the company to build stronger relations with its investors…..to lessen speculation and improve credit-worthiness, details of the restructuring plans should be communicated thoroughly to the public. Also, disclosing financial accounts and business strategies of all government-related entities would rebuild Dubai’s reputation and encourage local and foreign investors.”
On September 9, the government-owned DW said it had reached an arrangement with more than 99 per cent of its creditors to restructure the debt. The company expects to finalize the deal by the end of September 2010.
“The news of the arrangement is expected to have positive effects on the UAE as a whole and boost investor confidence in its banking sector,” GIH said.
“The news of the restructuring comes at a very opportune time with UAE markets being included amongst the emerging market index of the FTSE. This essentially means that about 170 funds tracking this index will need to gain access to the UAE markets, which will lead to capital inflows in the emirate.”
The study noted that while the restructuring of DW debt comes with “cheers”, the short and long term effects of this event need to be evaluated.
It said Dubai’s ability to continue to lure foreign capital will suffer temporarily but added that this could change once the relationship with government-related entities is explained and financial transparency and disclosure are improved.
“In terms of banks, we understand that after restructuring, a shortfall in the present value of future payments will lead to an increase in provisioning requirements, which could be a burden on a bank’s bottom-line depending on its exposure to DW and the level of shortfall in the value of future payments.”
The study said a successful restructuring of DW may still result in banks taking a “strong pinch” over their earnings.
It said preliminary estimates reveal that this loss could be in the range of 15-20 per cent of loans exposure.
“This is nevertheless highly dependent on the guidelines issued by the Central Bank in conjunction to the opinions of the major audit firms….. we believe that the likelihood of banks taking provisions on account of DW, despite its restructuring, is imminent.”