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.

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