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Dubai World will present its banks with a restructuring proposal for its $22 billion debts by the end of next month.

 

An insider close to the Dubai government said that the struggling state-owned conglomerate will finalise a complete valuation of the group’s assets by the end of February and will have a restructuring offer on the table within the following four weeks. Reports leaked to the press earlier in the month, suggested that Dubai World could propose an offer to creditors with the banks receiving 60 per cent of their money back after seven years. The Government has denied this, saying that it is still working on its proposal. Once the offer is put forward, the government says it will be up to Dubai World to persuade its banks to accept the proposal. If no agreement is reached, the group could be forced to file for bankruptcy. It has also emerged that the government considered letting Dubai World slip into liquidation in late November and then buying back assets before it was persuaded to seek a restructuring.

 

However, the Dubai government Department of Finance said there would be no fire sale of assets to cover Dubai World’s debts and made it clear that banks may have to wait several years for the group’s portfolio to recover much of its value.

 

This was contradictory to recent sales. Istithmar, Dubai World’s investment unit, sold its 13.4 per cent stake in SpiceJet, the Indian low-cost airline, for $37 million this month, and has put Inchcape Shipping Services, its ports and shipping agency business, on the market for $700 million.

Other assets such as the QE2 cruise liner, Barneys of New York and the group’s stake in Cirque du Soleil are all expected to be sold in time to balance the books.

 

February 22, 2010

 

 

Analysis and Forecast: Increasing Risk

 

The issue of the Dubai debt does not yet appear nearing a solution. The reports and denials of the past few weeks lead to the following conclusions:

  1. Abu Dhabi’s support will fall well short of saving Dubai;
  2. Dubai has still not been able to identify of paying back its debts;
  3. The crises are long-term with chances of recovery for Dubai in the short to medium term very slim.

However, the issue of governance, transparency and overlap between private and public business remains unchanged. Dubai government officials have previously said that Dubai World is a private entity and its defaulting on debt is not a sovereign default. On the other hand, government officials are restricting what Dubai World’s options for resolving its problems are. One the one hand the government is saying that there will be no sale of assets of Dubai World, and on the other, Dubai World is going ahead with asset sales.

 

The most serious possibility is that Dubai World might declare bankruptcy. This was not easily possible until Dubai government passed legislation that effectively paves the way for Dubai World to declare bankruptcy. This indicates that issues of governance are far from being addressed. Besides the complications and financial problems, conflicting statements and vagueness about future plans has thoroughly undermined any credibility of what either Dubai government or Dubai World make about this issue. Given the time-scales involved and the Dubai business model, it appears unlikely that Dubai will be able to recover from its situation any time soon.

 

The figure below shows an estimate of Dubai’s maturing debt up to 2013