Markets respond positively to DW plan

The restructuring proposal submitted by the Dubai World Group (DW) has boosted sentiment in the market with most banking scrips listed on the UAE stock markets – Dubai Financial Market (DFM) and Abu Dhabi Securities Market (ADX) – making substantial advances on Thursday.

Most creditors wholeheartedly subscribed to the view expressed by Aiden Birkett, Chief Restructuring Officer of Dubai World, that, "This proposal represents the best possible solution for all stakeholders. The proposal that followed extensive discussions with our creditors and a thorough review of Dubai World's businesses and significant financial support from the government, certainly offers the company a strong future and the opportunity to maximise the value of its assets over the medium to long-term."

The bankers, who were all along discussing the levels of possible 'haircuts' the proposal could put forward, were pleasantly surprised when they learnt that the Dubai World restructuring proposal did not make any mention of a 'haircut' on the principal amount.

Responding to Emirates Business' request for a comment on the development, Ashok K Gupta, Chief Executive (GCC Operations), Bank of Baroda, the only Indian bank with UAE branch operations, praised Government of Dubai's decision to inject funds of up to $9.5 billion (Dh34.89bn) in Dubai World and Nakheel. "This is very important and is really positive and encouraging."

A top official from a leading Dubai bank termed the Dubai Government's move to convert its debts and claims on Dubai World into equity, as a very proactive step at this point in time. The Government of Dubai, acting through the Dubai Financial Support Fund (DFSF), is proposing to convert $8.9bn of debt and claims, representing 38 per cent of the total amount of standalone debt and guarantees of Dubai World, into equity, subordinating its claims to other creditors.

Moreover, DFSF will commit to inject up to $1.5bn in cash into Dubai World to fund the company's working capital and interest payment commitments that will arise from the new debt facilities. "This will strengthen the debt-equity ratio of the company which in turn will improve it's standing in the international market," he added.

The total amount of outstanding debt held by Dubai World's creditors, excluding existing DFSF claims, is estimated to be $14.2bn as at December 31, 2009.

The DFSF statement said Nakheel will use a significant proportion of the funds provided by the Fund to complete construction of near-term projects. Nakheel will provide customers with clarity on completion and handover dates of those projects. "This is likely to encourage other developers to revive the projects that are on hold and also to take on new projects," said a developer.

Trade creditors of Nakheel would be offered 100 per cent recovery of their agreed claims with 40 per cent in cash payment (based on agreed claims) and 60 per cent in the form of a publicly tradable security (based on current claim estimate amounts) at a commercial rate. Moreover, the secured lenders under syndicated, club and bilateral facilities will receive 100 per cent of principal and accrued interest or profits through a rollover and maturity extension on existing facilities, based on Eibor/Libor.

The restructuring proposal has made its intention clear that the 2010 and 2011 Nakheel Sukuks will be paid as they fall due. Holders under Nakheel's unsecured Ijara Club facility will receive 100 per cent of principal and accrued interest or profits through a new debt facility with any existing third party credit support remaining in place.

The DFSF will move to strengthen Nakheel's capital base by converting $1.2bn of debt previously loaned to Nakheel, into equity. The DFSF said it will equitise $8bn of funding subject to a successful closing of the Nakheel and Dubai World restructuring.

However, banks are eagerly awaiting details of the bond issues that are intended to replace the loans. Though most of the existing loans are nearing maturity, with almost all of them timed to mature within three years, the new bonds proposed through the restructuring plan will have maturities of five years and eight years.

Analysts expressed hope that the UAE Central Bank will take a lenient stand on provisioning on banks' exposure to Dubai World. "We have seen that in the case of the UAE banks' exposure to troubled Saudi groups – Algosaibi and Saad – the regulator has given two years' time to provide against bad debt generated from these exposures," they explained.

Ashok K Gupta, CEO (GCC Operations), Bank of Baroda:

Injection of funds of up to $9.50bn by the Government of Dubai in Dubai World and Nakheel is a very important, positive and encouraging step. We at Bank of Baroda (BoB) always had faith in the leadership of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE, and Ruler of Dubai, and in the Government of Dubai that they will always support Dubai World. We were convinced that the entire issue will be resolved by taking care of the interests of all concerned. Our conviction has proved correct. This unstinted support from Government of Dubai will further increase the confidence of all concerned in Dubai and will help in the faster recovery of the economy.

Henry T Azzam, CEO, Middle East and North Africa, Deutsche Bank:

Dubai World is restructuring its debt. It will lead to an agreement with its creditors to restructure the debts. The debts will be paid in five to eight years with some interest without any 'haircuts.' This will boost overall confidence in the region. The creditor banks do not need to take further provisions on their books. The market reacted very positively to this development. Dubai Credit Default Swaps (CDS) have been improving all along. This is an indication that international markets are more confident that Dubai will live up to its commitments.

Mohammed Ali Yasin, CEO, Shuaa Securities:

It is a very positive statement exceeding expectations of all participants. This will benefit creditors, contractors, investors and everyone involved. The whole economy will get a boost. The markets took it very positively on Thursday. The 100 per cent settlement of debt testifies to the government's responsibility. I believe there will be some more rally next week. Still, we need to see the complete details of the package. On Thursday, the DFM Index broke new resistance level closing at 1845.21 points. The next resistance level is 1960 points. Let us look forward to the index surpassing these levels. We are close to the first quarter. The performance of companies will decide the next level of trading as the continuation of the present rally is dependent on encouraging earnings numbers. Otherwise, consolidation on the markets is expected.

Eyad Abdulnabi, CEO of Al Ramz Securities:

It is excellent news for the market, which moved very positively on Thursday. This news from Dubai World has put the markets in a repositioning state on short-term, medium-term and long-term perspectives. We saw volumes soaring on the bourse to surpass the Dh1.7bn-mark as anticipated. We expect another rally next week taking the DFM Index up by about five per cent. Above this level, we may see profit booking later on. One thing is for certain, foreign investors are back in the market."

Fadi Al Said, Head of Mena Equity Research at ING Investment Management, Middle East:

It was much better than expected, specially the Nakheel Sukuk payment. This was reflected in the relief rally on Thursday. We can say that it was a Nakheel-specific rally too. The timing of the announcement was well-managed. The rally on the bourse took off as of the beginning of March as the marker was anticipating favourable news from Dubai World. Moreover, the reassurance coming from the Government of Dubai in a clearer way is a major relief for investors in equities, Sukuks and the whole economy. I think it will be positive in the short-term and long-term as well.

Robert McKinnon, CEO at ASAS Capital:

The market in general moved positively to the latest announcement from Dubai World, which offered a better-than-expected package. Markets will take positive cues from it. This is good news for Nakheel bond holders too. This will set the right direction for Dubai. I expect that there will be an add-over to the present rally next week. This is probably the best outcome from Dubai World. However, some details in the package are not clear.

Dr Salwa Hammami Labib, Senior Economist, Arqaam Capital:

Judging by the impact on the market, the proposals have been positively received as anyone would expect at first reading. They are still short on a lot of details like the terms of the new debt to Dubai World creditors. They will not unlock activity in the property market in the short-term and the emirate's future public finances will have to shoulder some of the burden, but they will take a lot of guesswork out of trading, especially as far as the Nakheel Sukuks are concerned. Alongside this and despite contending to increasing the sovereign's exposure to Dubai World, they underscore the growing recognition of the dissociation between the sovereign and its commercial enterprises.

Credit Suisse:

We believe the news is more positive than what the market expected with immediate positive implications for credit and equities. Wednesday's prices of $70 (Dh257) and $67 for Nakheel 2010 and 2011 bonds, suggested the market was pricing in 40 to 45 per cent haircuts (sourced from our credit team). Clearly, news that both bonds will be paid in full on maturity was completely unexpected. Although there is some risk given that the Government of Dubai has said the offer to pay Nakheel bonds in full is contingent on banks and trade creditors accepting the proposals made to them, we think there is a very good chance the proposals will be accepted given that this seems much better than expected. We also continue to believe that the banking sector is well capitalised. The news should be particularly positive for Emirates NBD and Abu Dhabi Commercial Bank, which have the largest exposure to Dubai World among the local banks. (With inputs from Sreenivas Rao Desari, Piyush Pandey and Sunil Kumar Singh)

Follow Emirates 24|7 on Google News.