DW support plan to ignite growth

The recent announcement by the Dubai Government of the support and restructuring programme for Dubai World and Nakheel is a significant and important step in Dubai's and the Emirates' recovery from the global financial crisis and specifically the debt problems the group has faced. Both company's were hit hard by the global credit crunch and the sharp downturn in the domestic property market. The government's cash, financing and equity injections are a big commitment and underlies the resolve to draw a line in the sand. In all likelihood, the bottom of the debt and financing crisis has now been reached and, providing the restructuring proposals are agreed, both the Dubai and UAE economy should be boosted. Indeed, the restructuring proposal is a big benefit to the GCC as a whole, particularly in terms of sentiment and confidence.

The overall package for the support of both companies, including cash, financing and equity, is well in excess of $10 billion (Dh36.73bn). The cash injections, specifically to cover working capital and interest payments are very important. It provides both – Dubai World and Nakheel – with the necessary funds to maintain their activities and operations and pursue their business plans. This will give the companies the time to rise out of the economic downturn, waiting for asset values and market liquidity to rise before looking at investment disposals. Other companies in the region, who have faced similar debt and financing problems, have not been able to survive as financing dried up, asset values dropped significantly and the fall in prices did not tempt buyers for assets.

The support plan also highlights the importance of government link and ownership, as the restructuring is a government bailout. The plan is a significant boost to creditors to both companies, and certainly beats most expectations. Private creditors will receive 100 per cent of their claims, roughly around $14bn, though the issuance of two new tranches of debt. Both tranches are not overly lengthy, at five and eight year maturities. The outstanding Nakheel 2010 and 2011 sukuks would be repaid as long as the proposal is agreed.

Nakheel will pay off all creditors over time and focus on completing near-term projects. Again, this will help support the local and regional property market as well as associated industries and suppliers together with the financial and banking sector in the UAE. The government funding for Dubai World will rank subordinate to existing creditors. The government's $1.2bn claim on Nakheel will also be converted into equity, allowing creditors to rank ahead of the government.

Secured financial creditors will have their loans and interest rolled over, while unsecured creditors will receive a new debt facility. This is a win for both types of creditors. Trade creditors also benefit through receipt of cash and securities. This is a bonus as often they are not compensated. However, through their compensation, other suppliers will also benefit. In affect all creditors and stakeholders have been supported by the authorities.

The restructuring still needs to be approved by creditors. The large creditors have been party to the proposed restructuring prior to the official announcement in any case. As with other debt restructuring, it needs the agreement of all creditors. This may not be quick or easy but the deal on the table is expected to be passed by all parties as the plan is far better than nearly all expected. It would be fruitless for any to try and get a better deal as the one on the table does pass all expectations. Moreover, the Dubai Government can go to the Dubai World Tribunal if only a minority of creditors disagreed to force the plan through.

Both companies now have a much stronger balance sheet and working capital to carry on with their activities. More importantly, it gives them the capacity and opportunity to refine their strategies, focus on core holdings, and strengthen their positions going forward. Their ultimate vision may not be to the lofty extent previously but the long term plan going forward will be viable and achievable. Crucially, those projects already started will be completed. Nakheel will receive $8bn from the Dubai Financial Support Fund to complete a number of its unfinished construction projects across the city. This is important to the wider economy and for igniting further economic growth in the future.

Through the support for the companies at the Federal level, confidence will grow, enabling both the Dubai economy and the Group to move forward. Dubai World still possesses some strong companies in the portfolio and with the new financing and capital injections, should make a good recovery from this point based on a more prudent strategy.

- The author is a US-based commentator on business issues