Dubai Restructures Its Debt, But Not Its Obligation

The desert kingdom of Dubai has come up with a novel way to pay its debt–it will roll it over to another day in another year sometime in the future. It will give creditors an IOU of sorts, which may or may not be paid depending on the world’s economy and Dubai’s own.

The FT report of the new deal is that Dubai will restructure the debt of Dubai World and its real estate arm Nakheel. Nakheel, in particular, needs the capital. The value of many of its holding has collapsed with the global commercial real estate market.

Abu Dhabi is critical to the restructuring of debt. The $10 billion it provided to its neighbor Dubai will be used, in part, to solve the poorer kingdom’s troubles. Almost $6 billion of the money from Abu Dhabi will be used for the new creditor program.  The FT reports that “Dubai World will receive a $1.5bn cash injection from the government to cover working capital and interest payments, with the $8.9bn of government funding and claims turning into equity in the government-owned business, thereby subordinating the debt to other creditors.”

That is the comforting part of the transactions. Non-government credits will get back all of their principal–about $14 billion in total. But, they will get this in the form of note with five-year and eight year majorities. Dubai may have no better chance to make good on these obligations in a few years than it does now.

Unsecured creditors will get a new set of notes, but of course they will remain unsecured, which means that any future problems with Dubai’s sovereign obligation will put them at the bottom of a very long list of debt payments, none of which the government can promise it will make.

The new deal is the best deal that banks and other creditors will get because they ultimately have less leverage with a sovereign nation which is essentially a theocracy than the do with a multinational corporation which they can liquidate. The desert sand is nearly as valueless as Dubai’s commercial real estate holdings.

Douglas A. McIntyre