Around the Debt Table

One of the crucial lessons of banking is that when you lend someone say $1 million you, as a banker, have a commanding position with the borrower, but when you lend him $26 billion, as is the case of the Dubai World bankers, then frankly speaking you cannot afford to take as tough a position as you may seek. As dismal as that may sound, Dubai World, Dubai and the UAE also have a reputation they want to protect and ofcourse heal the recent acrimonious display of relations with lenders and bond holders. Armed with a new bankruptcy law, administered by some of the best western legal minds, does mean that creditors of Dubai World will have to get used to the legal formalities of such laws in the case of debt recoveries. The litmus test that will apply in such reorganization applications is that a) the company made its best efforts to convince the creditors on its reorganization plan, b) the plan provides relief to the company to reorganize itself and implement a plan that c) provides the economic possibility of a recovery better than say a fire sale would at the present.

If this test is met then the judges will be inclined to allow the company the time and the patience to meet the objectives of the plan and something the creditors may well have to swallow. Indeed, UAE entities will be penalized over the cost of new borrowing should this be the route taken.

However, my call is that when the bankers sit around the table with the company and its advisers there has to be a sense of balance that they will have to gauge. Its all fine to be publicly emotional about the whole sordid episode but we are dealing with huge sums of money and bankers cannot, and should not, let their ego's into the way. I would suspect if the plan is workable, and this is reasonably demonstrated in such a meeting then banks could agree to a restructuring of their loans in a manner which allows them interest payments and a defined structure for the future repayments of the principal amount lent.

On Dubai World's side, just because the recent legislation gives them negotiating clout does not mean they wield it. Some of the best deals break down when people get stubborn over what in the end are minor issues. Dubai World should, in my opinion look at some of the assets it holds and assure the banks that there is a plan for the sale of these assets and to satisfy them that their entire lending did not go down into a bottomless pit. Yes the land bank held by Dubai World's property arms is seriously impaired, but realistically speaking real estate may get sick from time to time but it never does really die. If the wait period is say 5 years under a restructured plan then there is a high chance that some of these impaired values may well recover, while not the to dizzy heights of two years back, but certainly well off the bottom that we saw a month back.

Dubai`World will have to also think more pragmatically and let go those plans that do not seem feasible at the moment. There is no joy in hanging onto a master plan of a project when it is highly unlikely for it to materialize in the next few years. What bankers and lenders need assurance is that the realities of the market situation are recognized and there is a willingness to cut the cloth to that size. I do know that some bankers will remain adamant about being repaid in full, perhaps buoyed by the recent news that in talks in London senior Dubai officials said repaying all the debts in full was an option. However, testing that will through the bankruptcy court is not a wise choice. I would always say that sometimes a bad settlement is better than a good court case.

I do feel that bankers are well advised to hammer out a balanced agreement and assist in the restructuring of the company. This is really the way forward that gives enough elbow room for everyone to move forward and has the best chance of being in a position that is better then where things stand today.