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.
Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts
Monday, March 1, 2010
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.
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.
Thursday, December 31, 2009
Banking Report: Analyzed
The EFG Hermes report on some of the banks is interesting by all means, while not aimed at a credit assessment but more at stock performance, it nevertheless presents a balanced view. While there are some notable exceptions in the report I have seen, like Mashreq and Union National Bank (my former bank), it does make the point that the current financial woes are not as bad as they sound. The 3rd quarter performance of the banks was better than expected and judging by the analysis the banks that appear as laggards in their analysis are not on account of credit issues but more management style and focus in terms of the economic segmentation they pursue for earnings. While I am a traditionalist who would not rely on inter bank borrowing to fund the loan book, I concede in the ten years I have been out of managing a bank a great deal has changed. While back in the 1990's international banks panicked at the slightest political trouble in the region, the trend since then has been more mature and banks do not cut lines at the slightest of whims as they used to back then. Thus inter bank funding is more stable and can be seen as a factor in funding the loan books of banks, even though I was surprised that some banks from the sub continent got over cautious through the recent Dubai World crisis and while not cutting exposures to the country did have a 'wait and see' policy.
Indeed it was interesting that their analysis of the Dubai Inc (a loose word to describe all the debt of Dubai Government and the GRI's) is spot on in mentioning that while the numbers seem significant, even to GDP, there are two aspects that need consideration, a) the surplus cash flow of the good companies can be used through the parent structure mechanisms to help the weaker ones. and b) there are a number of assets that are eventually available for a sell off or privatization, (though they don't make these two points-that is how I read it). The current restructuring is a major element of this conundrum that needs to be solved and for this I would urge the Dubai World and the government to set a much faster pace to come to a settlement with the banks on this issue.
While the financial press have made a big deal, even today, about the support that has come from Abu Dhabi and hinted about it not being available in all circumstances (see today's FT) they forget that no support can be a carte blanche and has to be discussed on the merits. Interestingly yesterday an Abu Dhabi official spoke to Moody's Investors, as they have reported, and discussed that they have more than twice the reserves of the whole UAE public sector debt (assuming even the GRI's) in just one entity, to which if you add the Central Bank reserves and the other assets held by UAE entities the situation is more than comfortable. This is where I get so frustrated with reporters than they miss the big picture. Abu Dhabi thinks of the country as a whole, and eventually will be there to stitch things up, perhaps at a cost but it will be done.
The analysis of the banks in each of the cases is interesting. It is heartening to note that banks like EmiratesNBD and National Bank of Abu Dhabi still figure out as the strongest and the impact of either one of them of the current situation is minuscule. EmiratesNBD with a captial adequacy of near 20% and a provision of 95.5% of loans actually stands out better than Moody's would have us believe just two weeks back. None of the banks in terms of their capital adequacy numbers or coverage for non performing loans seem to be a problem. It is highly likely that into the mid of 2010 we may find over provisions on most of the balance sheets, which I strongly advise the bankers not to move back into profits. This will offset some of the need for higher provisioning on the general commercial and personal lending portoflios that may have suffered through the slow down.
In the end the macro economic scenario will play an important part. Higher liquidity, small to medium sector finance availability, and better respositioning of the asset-liability mismatch, which plagues all banks in the region, will ensure a stable to better year ahead. Significant in this process will be the following factors:
a. Better GDP performance.
b. Stability on the issue of the debt restructuring.
c. Middle market performance being better, i.e. trading, retail and services.
d. A steady real estate market, which while overburdened with supply will still gradually get over the panic stage.
e. A greater awareness of UAE position as a regional hub for business.
While I am not predicting major new avenues of business income for the banks in the year ahead, i.e. IPOs etc, I do feel that they will protect their market share better, hoping a better corporate and government sector performance will offset a weaker personal debt performance in the year ahead. Banks who manage to address the asset-liability mismatch early into the year will find themselves lighter on their feet and more nimble to take advantage of a recovery.
In terms of safety of the banking system I have the least of worries. No Bank incorporated within the UAE has ever been allowed to go under. (BCCI was not UAE incorporated and interestingly according the Sept 2009 Liquidators report of that failed bank 81% of all creditors have been paid, which must be some sort of a record as normally failed banks struggle to pay off 40-50%). I am positive of this that the UAE cannot and will not let a bank fail, to which is added a better regime of regulatory control and a more mature management in most banks.
How do I see the year ahead for the banks? In a nutshell: stable to better performance, dealing with the recent past bringing cheer with each successful settlement or restructuring and in terms of safety pretty much at the top of the definition of 'prime quality'.
Indeed it was interesting that their analysis of the Dubai Inc (a loose word to describe all the debt of Dubai Government and the GRI's) is spot on in mentioning that while the numbers seem significant, even to GDP, there are two aspects that need consideration, a) the surplus cash flow of the good companies can be used through the parent structure mechanisms to help the weaker ones. and b) there are a number of assets that are eventually available for a sell off or privatization, (though they don't make these two points-that is how I read it). The current restructuring is a major element of this conundrum that needs to be solved and for this I would urge the Dubai World and the government to set a much faster pace to come to a settlement with the banks on this issue.
While the financial press have made a big deal, even today, about the support that has come from Abu Dhabi and hinted about it not being available in all circumstances (see today's FT) they forget that no support can be a carte blanche and has to be discussed on the merits. Interestingly yesterday an Abu Dhabi official spoke to Moody's Investors, as they have reported, and discussed that they have more than twice the reserves of the whole UAE public sector debt (assuming even the GRI's) in just one entity, to which if you add the Central Bank reserves and the other assets held by UAE entities the situation is more than comfortable. This is where I get so frustrated with reporters than they miss the big picture. Abu Dhabi thinks of the country as a whole, and eventually will be there to stitch things up, perhaps at a cost but it will be done.
The analysis of the banks in each of the cases is interesting. It is heartening to note that banks like EmiratesNBD and National Bank of Abu Dhabi still figure out as the strongest and the impact of either one of them of the current situation is minuscule. EmiratesNBD with a captial adequacy of near 20% and a provision of 95.5% of loans actually stands out better than Moody's would have us believe just two weeks back. None of the banks in terms of their capital adequacy numbers or coverage for non performing loans seem to be a problem. It is highly likely that into the mid of 2010 we may find over provisions on most of the balance sheets, which I strongly advise the bankers not to move back into profits. This will offset some of the need for higher provisioning on the general commercial and personal lending portoflios that may have suffered through the slow down.
In the end the macro economic scenario will play an important part. Higher liquidity, small to medium sector finance availability, and better respositioning of the asset-liability mismatch, which plagues all banks in the region, will ensure a stable to better year ahead. Significant in this process will be the following factors:
a. Better GDP performance.
b. Stability on the issue of the debt restructuring.
c. Middle market performance being better, i.e. trading, retail and services.
d. A steady real estate market, which while overburdened with supply will still gradually get over the panic stage.
e. A greater awareness of UAE position as a regional hub for business.
While I am not predicting major new avenues of business income for the banks in the year ahead, i.e. IPOs etc, I do feel that they will protect their market share better, hoping a better corporate and government sector performance will offset a weaker personal debt performance in the year ahead. Banks who manage to address the asset-liability mismatch early into the year will find themselves lighter on their feet and more nimble to take advantage of a recovery.
In terms of safety of the banking system I have the least of worries. No Bank incorporated within the UAE has ever been allowed to go under. (BCCI was not UAE incorporated and interestingly according the Sept 2009 Liquidators report of that failed bank 81% of all creditors have been paid, which must be some sort of a record as normally failed banks struggle to pay off 40-50%). I am positive of this that the UAE cannot and will not let a bank fail, to which is added a better regime of regulatory control and a more mature management in most banks.
How do I see the year ahead for the banks? In a nutshell: stable to better performance, dealing with the recent past bringing cheer with each successful settlement or restructuring and in terms of safety pretty much at the top of the definition of 'prime quality'.
Monday, December 21, 2009
The Dubai World debt puzzle.
I get accused these days of being a Dubai 'fan', all the more strange since I hope I have been pragmatic in my advice to both sides. Yes there is not denying that I do love the UAE, it has a great deal what is good and when it has needed improvement I have spoken out, not as a cynic but as a friend who means well. I have been a banker for a major part of my life, and have viewed banking and bankers from a close distance this past ten years.
As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.
Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.
But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.
My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.
I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.
This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.
As Dubai World announced its intention to restructure its debt, even though getting to that stage may well have been a comedy in its own right, I wondered about what bankers were thinking. Indeed, some claimed they were under the 'impression' that the Dubai government was the ultimate guarantor of the loans; a silly argument on two accounts, a. the documentation for the loans never state that, and b. the decree that set up Dubai World clearly states that the government would not in away guarantee the loans or obligations of Dubai World. So how come this sudden myopia on the part of the bankers.
Bankers are forgetting their heydays of lending, and this was like a wild spree. A European banker had the gall to say to me that they did not know the extent of the obligations of the Dubai World, and had they known them they would not have lent money! First of all if I had to choose the most ridiculous statement in this whole saga that would surely be my choice. You expect me to believe that banks piled on $26 billion of debt and did no due diligence, did not ask for financial statements, did not check the news back then where every month banks were announcing new lending syndicates, and my European banker friend was tucked away in London reading the Financial Times and signing away loan approvals. Banks have risk management departments, credit committees and legal minds that are keen to know the interconnectedness of each entity around the borrower and indeed the relationship, in legal and contractual terms with the shareholders.
But then when a bankers bonus is determined by the number of assets he writes onto the books of the bank, and the bonus is paid soon after the loan is booked, why should he really be worried about all the details? Were the bankers negligent in their lending? Perhaps in a sense yes; after all if they did their homework some of the lending could have been curbed based on the 'concentration of risk' argument, where the leverage piled onto Dubai World, even in the bright days was remarkably more that what the Dubai government itself was borrowing.
My banker friend also suggested he did not know what were the assets of Dubai World? Then the simple idiotic question comes up as to what was the basis of them lending? I can understand bankers wanting to know what is the value of the assets today, after the impairment in the market place, but to claim at that time bankers did not know what assets were covering their loans really sounds totally out of place.
I believe that while Dubai World may have been careless in its pursuit of glory or possessed with and abundance of wishful thinking that people will buy into their dream in droves, or a mixture of both, it does not absolve the bankers of their loss of reason. Yes corporate governance and all is fine, but this is all about asking the bankers and lenders to be clear of what they did wrong. I am surprised the financial press, who normally are good at pointing out who messed up are giving the bankers a bit of a free ride. But then every saga needs a victim and somehow the bankers want us to believe they were duped into this huge lending.
This is certainly not the case. The banking world does not work this way. The details on lending applications, especially of this size, run into volumes of analysis, opinion and credit and risk assessments . If these were not done then frankly these banks should just have to bear the brunt of their mistakes and at best agree to reschedule the debts and wait out the recovery.
Sunday, November 29, 2009
Dubai World: A spin that is hard to follow.
Dubai's debt woes have captured the world news attention, with articles written by people who are familiar with the region and the issues, and some obscure journalists who would be hard pressed to find Dubai on the world map. My three decades of experience living in UAE, and almost all of it in the financial sector, as a participant and observer, has taught me that in many cases the depth of the problems may well never be known, but in equal measure the efforts going into the solutions are always clouded in a measure of secrecy.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
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