Monday, March 1, 2010

On haircuts and debt settlements.

There has been recent talk, some of it unsubstantiated press rumors, that Dubai World, the debt laden Government Related Entity of Dubai, has been contemplating, on the advice of its consultants, to consider as much as a 40% haircut on the debt and repayment of the balance over seven years with no interest. Needless to say, banks had two reactions ignore the rumor, (hard to do in the present day) or just balk as the audacity of the whole idea. Haircuts and debt repayments only happen to work, if that is the word to use, when there is literally no hope for any possibility of the principal debt ever being repaid. If the rumor was an attempt to test the waters, then the consultants need a fair dose of understanding that you hold a dialogue with the banks and do not pretend to have a conversation through the rumor mill, this always backfires.

While I am not privy to the discussions or indeed the people who are making these decisions, so what I venture our is conjecture and my recommendations may well be off the mark; yet as a three decade resident in the financial world of UAE, and an ardent well wisher for the country I would imagine a solution oriented approach is what is needed. What are the options ahead for this debt settlement?

In the first place we must be clear that the entire extent and complexity of the Dubai World debt is not entirely public and in similar vein neither is the possible cash flow profile over the next few years really known to the general public. Thus, if a seven or five year repayment is suggested it goes without saying that the cash flow projections will have to match this settlement profile. Keeping this in mind I would suggest the following.

1. When considering a haircut of any amount there has to be a clear understanding that this is seriously hurt the image and the standing of not only Dubai but also UAE within the financial community. Even if such an offer is accepted it will be with the gesture and lack of goodwill to provide additional funding in the future even when things are better. Bankers have a long memory and will remind you of their losses from decades back. Any haircut that is suggested has to be tied to an incentive. My suggestion would be to offer the banks a 70% settlement with the balance 30% to be strucurted as a Zero coupon bond with a long maturity and the caveat that this 30% would be exempted from payment under a formula for early payments. Thus if the 70% is to be paid say in seven years then for each year this amount is paid earlier there is a percentage of the 30% zero coupon bond that is written off. This creates an incentive for DW to pay early to get the discount. Ofcourse, the 70% should carry a new negotiated interest rate.

2. While legally there is the possibility of a bankruptcy to be considered and a financial 'guru' even said to me that there is no harm in such a route being explored and mentioned the examples of Enron, Japan Air Lines and many others. My simple response is that those were not GRE's and were joint stock companies with a broad public shareholding, DW's default will in the end be seen as a moral default of the entities behind it and this is not an option that should be even discussed.

Then the smart one's will ask are we not in a catch 22 situation?

In a sense yes, but then we have to consider long term solutions. Here is what I would do.

1. Within the UAE finance structure the Dubai Government should consider a long term Treasury Bond issuance program. These bonds should not only be seen as a monetary measure to deal with the deficit but also to restructure the debt of the GRE's in a manner similar to what many governments around the world do. US Treasuries are issued all the time and new issues retire old bonds and the cycle goes on under a long term program. It is precisely the lack of this program that has resulted in the funding of long term project needs with short term borrowing resulting in this mess.

2. The current Federal and Abu Dhabi Government assistance should also be rolled into this Treasury Bond program and perhaps even seek a tier one issuance with the Federal Government or Abu Dhabi government subscription of the earlier issues. This will bring much needed liquidity into the trading of these Treasury Bonds.

3. The UAE Central Bank to support such a program in the classification of these as investment securities rather than as simply loans to Dubai Government.

4. Set out the assessment of the cash flows of Dubai World and seek an debt retirement program which is realistic and not based upon the hope of things improving. It will mean that more detailed information on the cash flow and asset profile of the company and then to see how this can be managed to meet the obligations. With the backdrop of a Treasury Bond program the pressure to come up with three, five or seven year debt repayments will be overcome as the Treasury Bonds, through their liquidity and re-issuance programs will be able to manage a more orderly debt retirement rather than a pressured situation as we sit in today.

The reality is that any settlement of this debt has to be realistic in its scope and intent; failure to recognize the sensitivity of the situation within the financial world would have repercussions that might be hard to deal with. It is therefore vital that for the good the country's standing a positive approach is important in this situation. I am not convinced that haircuts and interest waivers is the solution, this is not giving the right message.

Tuesday, January 19, 2010

Is Dubai Inc's debt really $170 billion?

The EFG Hermes report that suggested that Dubai Inc, implying all government related enterprises (GRE) and direct government debt could add up to between US$ 130-170 billion opens up a discussion in ones mind. The report suggests that the current known debt of $96.6 billion could be higher on account of the bilateral loans with local banks. It even cites the possibility that EmiratesNBD bank might have an exposure of $24 billion to Dubai Inc. This prompted me to check the balance sheet of the bank and to glean through the information known in the market and reported from time to time. The related party exposure shown at end of September 2009 in the balance sheet shows DH 45 billion (not dollars) due from possibly Dubai Inc as a whole, and there are deposits etc of about Dh 7 billion. I cannot therefore understand how such an assertion can me made. The entire loan book of the bank is US$ 53 billion of which just retail lending is $ 6.56 billion and then there is the trade finance and corporate lending, which when is adjusted to the over all loan book, by reason of deduction can only end up with the Dubai Inc exposure as $12 billion or so.

In addition, the local banks also have have massive deposits from the government entities and this is a major part of their float that comes to them and is a key part of the interest margin that they earn.

At the time of the Dubai World announcement in November 2009 the total debt estimated, which includes obligations to suppliers and contractors, was around $82 billion. Yes new obligations were taken with the Central Bank and the recent Abu Dhabi assistance which would not, in theory change the position of the over all obligation. Assume that of the $25 billion raised from the Central Bank and the Abu Dhabi assistance, about 75% was used to retire debt and the balance kept in reserve for operations or other maturing obligations, then even the net effect would be that the obligations would go up to US$88 billion.

How this can suddenly be considered a having increased to US$130-170 billion is baffling to me. I have always assessed that of the $82 billion about $60 billion is bank loans or bonds issued in the market and the balance $ 22 billion is creditors like consultants, contractors and service providers. A number of these creditors had either agreed or willing to agree to a reduction in their amounts in exchange for a definite payment plan.

I can buy the argument that if all the grandiose plans that were underway in Dubai were to continue at the same pace as they were in the early part of 2008 then indeed one can argue that the debt obligations of Dubai Inc would have mushroomed. Whether they would have been to the extent of $130-170 billion is a moot question. Intersestingly a couple of weeks back EFG Hermes published a report on the UAE banks and had made not any mention of the assertion that is being made today! So what information has come to light that would prompt this sort of assessment?

I am not suggesting that the research analysts at this reputable bank are being malicious but I do feel, very strongly, that issuing blase' statements is not conducive to the functions of a research analyst. After all we are not talking of an increase of say 10% which can be said to have happened in the normal course of business. In effect the suggestion is that the exposure to Dubai Inc is well over 120% more than was known to them or the market a few weeks back. This is where I think there are two options when I read such reports, a. press the delete button, or b. apply some common sense (which could be uncommon these days) and see is there any logic to this sort of thinking.

Clearly I took the second course. However, this asserts my position a few weeks back that it is time that a white paper is issued by Dubai Inc on the debts, the assets and that will clear up the air. This has, willy nilly, become a public matter through the way such reports have emerged in the media. This therefore needs a clear and coherent response from the right circles. I agree that bloggers like me can only speculate on the matter at hand, but we can use logic.

In a nutshell I find the nature of this report on the debt from EFG Hermes to be speculative in nature and I do believe that they owe it to the audience to explain themselves. Simply to assert that this could well be on account of bilateral loans from the banks which might not be reported is a rather serious accusation. I would presume the UAE Central Bank and the Auditors of the banks, all of whom are well reputed professionals, could hardly have sat by quietly eating their homous oblivious to any new lending spree in to Dubai Inc. I am in the consulting business and know for sure that new debt of Dubai Inc or most even well known companies is not on offer these days. Banks have hunkered down and just preserving themselves for the moment (not necessarily the best strategy in my opinion) but nevertheless that is how it is.

Ofcourse when the year end balance sheets come out in a few weeks time we will know for sure what the final verdict is. Till then I will reserve judgment and simply say that this report needs validation, and EFG Hermes may have got this one wrong.

Sunday, January 17, 2010

Dubai World: Debt Trading

In mature financial markets debt trading is a normal activity and provides depth and liquidity to the market. It allows lenders to lighten their position, add on new better spread business and indeed creates a secondary market that is conducive to the financial system. Generally debt traded is securitized paper, i.e. bonds and notes, and there is niche market for syndicated debt obligations, or bilateral debts. It is this second market where the bulk of the trading is done on a bi-lateral basis and the scope and coverage of debt varies from sovereign debt, both of a good quality and troubled debt, to corporate debt. Some astute operators actually make a good amount of money in dealing with this debt.

The report, whether press speculation or not, that some of Dubai World's debt is being traded now comes with mixed feelings to me. In normal circumstances I would agree this is a healthy thing. At the worst it suggests that some of the debt holders are getting frustrated with the progress on the restructuring of the debt. However, as the report suggests, for the moment it is smaller players, i.e. smaller international banks, who are getting rid of their positions, and this is something I would have expected much earlier. Indeed, in the period between Nov 25, 2009 and December 14, 2009 (when the Sukuk was paid) there was allegedly a good amount of trading in the secondary market.

I had in a previous blog mentioned what I would do if I was handling the Dubai World crisis, (not that I would be asked), and I would just relate that to this piece of news now. What is needed most of all is that Dubai World puts into place measures for confidence building and these would include seeing that are the real issues that are holding up an agreement with the banks. I imagine banks wanting interest servicing and structuring of the new debt to be linked. The report that the debt is offered at 70% of face value is a bit troubling because it might suggest that the negotiations may be surrounded by talks of a 'hair cut' on the principle amount. If indeed the debt is traded out then this complicates matters and a new creditor has to enter into the negotiations, who may either negotiate harder or just be adroit in his position; and we all know it just takes one bad egg to spoil an omellette. I believe that at this stage there should be no talk of 'haircuts' on the principal debt it unnecessarily bargains a short term gain for a loss of reputation that cannot be afforded to be lost.

I also would think that this debt trading is perhaps a signal from some lenders to simply complicate matters by throwing in the towel, cutting their losses and letting a new set of players deal with this. All this would mean further delays.

On the other hand Dubai World had asked till April 2010 to agree new terms with the lenders, so in a sense there is time, and yet in the scheme of how the world is that is not a great deal of time. So for the moment my own guess is this debt trading is a signal for all parties to hunker down and come to a broad agreement as quick as is possible, which will then allow time for the documentation to fall into place. I am sure that in the end there will be a successful resolution to this matter and as much as it it needs time it also needs focus and clarity on the broader issues that one has to deal with.

I personally feel in the current situation the news that the debt is being offered for trading cannot be all that good. However, it might be just the news that is needed to get things moving forward.

Tuesday, January 12, 2010

Dubai World: Some free advice.

Not being an insider, or otherwise in the know of what is happening between the lenders and Dubai World I am in a sense handicapped as to how to approach the issue of offering some unsolicited advice. At the outset therefore this attempt may well be scuttled as 'un-needed' but being a well wisher of Dubai and the UAE and conscious of the delicacy of the matter I am venturing forth with some advice.

Some of the biggest names in the business world have fallen on hard times, this is part of the financial history we know, and any study of them and their successful come back is based on one truth; an acceptance of the situation and the embracing of a high degree of humility to steer through the crisis. Because one whetted the appetite of bankers eager to lend and in a sense were in control of the situation is now a matter of the past, today its a different set of circumstances and counting friends is as important as cultivating new ones.

If I was Dubai World here is what I would do:

1. Seek a quick and equitable solution with the banks. Make this a priority above all else.
2. Given them the true picture of the health, or lack of it, today and show them the plan over say a five year period of how things are likely to change. Build scenarios, from the conservative to the most optimistic; the truth of what will happen lies in between.
3. Seek their advice where they offer it, and most importantly LISTEN.
4. What Dubai World needs to achieve is to fix the mismatch of its borrowing from the short term to the longer term, but this needs to be matched to a plan and not a simple roll over in a vacuum. Bankers need to know when they will be paid and how?
5. Do not take any confrontational stance, avoid words like 'standstill', 'rebates', 'write offs' and 'discounts'.
6. Do not threaten to seek bankruptcy this is no more an option given that everyone has expressed a public stance of solving the debt issue and remarkable progress has been made, some, ofcourse, with the support from Abu Dhabi.
7. Remember always, and this also applies to banks, that when you negotiate do not put people in the corner, then they act irrationally. A good negotiator keeps the other party in the center of the room so they can see all the exits and options,
8. Make it clear that there can be longer term repayments and these will need the support of the banks if they want to be repaid and allow for accelerated payments if the better, more optimistic scenarios start to unravel.
9. Given the recent two months of focus on these issues, this is no more an issue that ONLY concerns Dubai World, it effects the UAE and indeed even the region. This is the test of credibility and commitment.
10. Always remember that not all banks want this to be a battle of brinkmanship so it does not do good to walk the tight line each time.

For those who think that all the money went into a endless pit in the sand they too must realize that there are assets; land and other assets that Dubai World owns elsewhere. Yes the land is impaired in value, but it has some infrastructure on it and land may go sick for a while but it never dies. Eventually these land values will recover and this is a matter of patience, all that is needed is to realize that when you nurture confidence and do things to build confidence then this helps the recovery process. The world will not remain in a perpetual state of recession and this is also true of Dubai.

It was mentioned somewhere in the press that in January 2010 we would see progress on the restructuring talks between the banks and Dubai World. It is important that this process continues and information is made more available that indeed such meetings may well be going on. But get the news out that there is a dialogue; a much better message then people guessing what is going on.

Over all we must remember that indeed this a matter that can be resolved, the banks want it resolved and so does Dubai World. It is now a question of finding out what will be the meeting place of this resolve. This is a much better place to be in than neither side wanting to negotiate, yet there has to be give and take. The circumstances dictate that and demand that. Pride, on either side of the table should be put aside, as must the opinions of lawyers who may prefer to be pit bulls wanting to fight rather than legal counsels assisting in an equitable solution.

I believed that the Sukuk that started this whole saga would be paid and it was. I also believe that a restructuring will happen, even though at times it might seem everyone has hit a brick wall and tension will heighten. The truth is that everyone knows too much is at stake for it not to happen.

Sunday, January 10, 2010

Dubai's Media Gambit

Dubai has announced that it is merging some of its media handling assets, like Brand Dubai, the Dubai Press Club etc, all into a new form and structure. This perhaps does, in one important sense, clear up the confusions of what each media unit did on their own. More importantly, till the last quarter of 2009 the general perception was that Dubai did handle the media better than most in the region. However, in my opinion their handling of the Dubai World debt issues was appalling and fell way off the mark, more so very uncharacteristically of the way Dubai handled other issues in the media. Indeed, the press in general does have the propensity to move people, companies and countries from 'darlings' to 'devils' in nano seconds and not even worry about the accolades they showered a few months back are now being replaced by journalist jibes.

Dealing with the media is an art, and in the ever proliferating world of media platforms, it requires speed of action and clarity of position on the subjects that crop up. Keeping silent at times is a virtue, but keeping silent in a crisis is a crime that the media punishes with the ferocity of lion going for the kill. Once having decided to speak, and needing to speak, it is important that the message is consistent, coherent and has clarity. Crisis management techniques are fundamental to this process of handling the media, one cannot just believe one has the gift of the gab. Yes the gift of the gab and a good presence can impress once, twice and perhaps if lucky a third time, then when it begins to wear thin the facade begins to peel away and the media then look for substance.

This substances comes from a proper media strategy and the use of think tanks to postulate the responses that can and should come up through the evolution of a crisis. "What if" scenarios are discussed at length, and often with people from the outside. There is no point in listening to an employee ramble on about how great everything is, because frankly the media does not buy that each time; one needs to have a broad input into the process. Twenty years back when I was dealing with an internationally explosive story, which stayed in the media for a good two years, I always made sure I met the critics more often than I met the supporters. In 1992 I was asked by a leading financial paper if the bank I ran had a problem, and I answered ofcourse we have a huge problem, and then explained to him how I believe as the CEO of the bank we will navigate through it. I guess the sting of his story was gone because he expected me to 'deny' there was a problem.

What Dubai is doing is in essence a good thing and a fresh start in handling things better with the media. It will need thought on many aspects of this process and I do believe they should, even at the national level, consider encouraging a think tank to be formed and to listen to them. I am no media expert and while have written extensively for 25 years on the region I still find it fascinating how in a crisis everyone gets paralysis, almost as if one wonders what is going on. I also believe we who are living and working in the Arab world have to stop saying the world press is unfair with us. This is life! We have elected to be part of the global system and benefit from globalization and with it comes the mentality of 'trial by press'.

Yes the international press has been harsh on the current debt crisis issue, and I have spoken against them, but I also believe we have to present our point of view, take responsibility for where we messed up or were not on the ball, and then move on with the strategy we have carefully framed. We must also cultivate our well wishers even if at times given the nature of journalism they will be critical of things. Perfection is terrible it cannot have children so why be sensitive to a few paragraphs that do not compliment what we have done.

The feeling I have is that while on paper this media management consolidation is a good thing and it will be interesting to see how it all unfolds in the manner in which a strategy is formulated and then rolled out. I am not a huge fan of big splash advertisement campaigns, they only make the media buying company rich, but rather believe in channels of media that are encouraged into a dialogue, like a forum in the media format itself that brings focus to the issues and has healthy debates. I think this is a good gambit that Dubai has played and it will now be important to see its results. As a first step it would help if they started a weekly media breakfast briefing, which should be off the record, and then bring in also people who comment and focus on the issues on the region and engage in healthy discussions with them.

Media management is about networks, cultivating them, nurturing them and honoring them in the long term. The biggest mistake to make is to think the media needs us, no we need the media, and this is why the pen remains more powerful than the sword.

Sunday, January 3, 2010

Burj Dubai: Symbol of Vision

On Jan 4, 2010, the main Sh Zayed Road, alongside which the Burj Dubai is situated, will, from late afternoon, witness a bumper to bumper traffic jam as people will rubber neck to see the 800 meter tower be unveiled to a world that held its disbelief for some six years. While the events of 2009, especially the last quarter, may have dampened the spirit of inaugurations, there is going to be no holding back as the ceremony marking its opening will commence. In the area around the tower those fortunate enough to be invited to the event will leave just about as much space as a taxi packed with hippopotamus will allow. Emmar Properties, the owners of this symbol of modernism will carry the pride of their work, hopefully also acknowledging the hard work of thousands of laborers who toiled to make this dream happen.

Yet, more than the adroit steadfastness of Mohammed al Abbar, who heads Emaar, the vision of Sh Mohammed bin Rashid al Maktoum, the Ruler of Dubai and Prime Minister of UAE, will be showcased. Indeed that vision may have been scaled back by the setbacks of Dubai World, but there will be rejoicing that Emaar did the impossible, not only for the vision of Dubai but for the UAE. At the same time the media is ofcourse looking at the future of the economics of such a grandiose tower. Admittedly such iconic buildings are not built to make money by the truck load, but more to act a beacons of progress and development. Indeed the Empire State Building took 19 years before it became profitable, and indeed did other such iconic towers take longer to break even. These buildings were built to become symbols of attraction and this is what Burj Dubai would also be for some years before it turns to be entirely profitable.

However, it remains to be seen if the cheer of such a launch will rub off onto the the depressed real estate market within the country. I am perhaps the optimist who refuses to see the glass empty, but there is no merit in the argument that there is an over supply looming in the horizon. While domestic population in Dubai may shrink by as much as 10% over the next two years, we should not forget that this shrinkage happens at the lower end of the job scales. While indeed 40,000 additional units on the market will create over supply conditions I do not see anything wrong with this as its time that greedy landlords also appreciate that an oversupply does mean that the rents will come down. This means the cost of doing business will indeed come down too. I also believe financial constraints, project delays and the general uncertainty in the market will mean that these 40,000 units will be phased into the market at a slower pace. People are worried that only 70% of the new units will be leased out, but then this is fine, as it allows a better balance to the market where leasing rates went out of control.

When the search lights and strobes will unveil the tower we will also notice the contrasting styles of Nakheel and Emaar. While the Burj Dubai will remain the icon in Emaar's cap, it has to also be credited as the one developer in the UAE who has actually delivered. The main feather in Mr. Abbar's cap will be that Emaar has delivered more completed real estate in the country than anyone else, and indeed this is something that they should to proud off. Yes some may argue that it may have over extended itself but we must acknowledge that it was no mean feat to build a 800 meter tall tower and the many other projects it completed. The question now will remain whether this alone will act as a watershed to commence the recovery of the real estate market?

While the financial press will do its utmost to spoil the party with the oft repeated remarks about the looming $22 billion debt of Dubai World, my own sense is that now a restructuring is pretty much on the cards. The twin effect of the Burj Dubai being open and the debt restructuring being completed will be positive and reinforcing. There will be differing views on whether the extravagance of having the world's largest tower was a necessity or not. This is now irrelevant as the concept of Burj Dubai was at a time when all things big were being considered and somehow the necessity to be in the Guinness Book of Records was paramount. Soon after the Burj Dubai was announced Nakheel, Dubai World's subsidiary, decided they needed a tower even higher, not to mention there were some private developers who secretly also craved the same idea. If nothing else the recent slowdown and the problems that have come with it have dampened those spirits with good reason.

The vision of equally tall towers popping up on the Dubai landscape will now be into the future and perhaps a very distant future. I personally hope that this will be considered the last of the 'tall ones' as other than satisfy ego and to be an icon there is no immediate need for another 800 meter tower. Dubai already has a few architectural icons and there is indeed no need to more to that list. Someone asked me about the vision for Dubai that was unveiled from 2003 and then refined at times is still intact or not?

The idea of being the entertainment capital for the region and the metropolis that competed with the best of the world is perhaps never wrong to conceive. I suspect the grand scale that was planned was being implemented too rapidly. Yes projects like Dubailand, Al Bawadi (a few kilometer strip of hotels) and the grand plans of Nakheel are either slowed down or perhaps will need to be chopped up. The exuberance of development was such that some ideas were just not financially practical but were being touted around with the glee of a child in a candy shop. Underwater hotels, revolving towers (one in which each floor revolved), designer labeled towers, theme parks that could perhaps attract a handful of people being compared to the likes of Disney all were welcomed in the enthusiasm of creating something new and something on a scale bigger than life. Anyone who questioned the economic viability of the ideas or the pace at which all this was happening remained the unheard voice. Projects like theme parks and massive residential complexes will be on the back burner for some years to come and this is a good thing. First the fundamentals have to be restored, the idea of the grand has to be replaced with the practical and as the financial system adjusts to the new realities it will also bring a more durable strength to the system.

Does this mean the vision of Dubai will not happen?

I would rather say it will not happen in the three to four year period but more as a part of perhaps a 20 year plan. There is nothing wrong with this dose of realism. I remember in the early 1990's and soon after the first Gulf War, Sh Zayed road was popping up as the new development area. A prominent businessman from Abu Dhabi decided he will be build the Holiday Inn Crown Plaza and everyone wondered what was going through his mind. As others followed suit and buildings started to come up analysts questioned whether there was a viable future for these buildings on Sh Zayed road. Yes it all seemed before its time and today too one can say some of the projects were before their time and some perhaps a decade too early. I believe the vision was not wrong at all, but the speed of trying to realize it all created pressures that were just too hard to handle, especially when the global downturn happened.

In this sense the opening of the Burj Dubai will mark the end of an decade of exuberance and show that the new decade must now be one of repair and consolidation. Yet in the landscape of the country the landmark will become, like the Burj Al Arab was for over a decade, a symbol not only of pride, but identification with an element of success that will be seen with either envy or admiration.