Dubai's government sees the move as vital to protect the local economy. But it needs the approval of Dubai World's lenders, who think Nakheel's creditors are getting preferential treatment.
The restructuring plan gives all lenders full repayment of the principal amount of their loans over an extended timeframe. However, Nakheel's bank lenders are being offered a higher interest rate, according to a person familiar with the situation.
In addition, Nakheel will receive all but $1.5 billion of the $9.5 billion new money the government is offering to recapitalize the two businesses. Nakheel's bonds, worth $1.7 billion, will also be fully repaid as they fall due in 2010 and 2011.
The difference in part reflects the security underlying the loans. A large chunk of Nakheel's bank loans and bonds are secured against property and land in Dubai. Besides, many of the bonds are held by hedge funds which are more likely to play hardball in negotiations.
That compares to the $14.2 billion of debt being restructured at Dubai World, which is all unsecured, and in the hands of banks more likely to consider the systemic impact of failing to agree a deal.
Nakheel's creditors are also being offered an interest rate deemed by lenders at Dubai World to be better than the "sub-commercial" interest rates they stand to receive -- even after including a payment-in-kind note included in government's proposal.
Dubai World lenders have not been treated unfairly. Banks do not want to take control of the company's troubled assets. Besides, propping up Nakheel reduces systemic risk in the region. Yet lenders, knowing the government is keen to get Nakheel and the economy back on its feet fast, will try to use their veto over the separation of the subsidiary to push for a higher interest rate and some other sweeteners. They may have some success.
CONTEXT NEWS
- Dubai World's creditors have complained that lenders to property subsidiary Nakheel are being offered preferential terms in the plan outlined on March 25 to restructure debts of around $24 billion at the government owned holding company.
- As part of the proposal, lenders to Dubai World will get a full repayment of the principal amount of their loans over an extended time frame between five to eight years. However, they are being offered a "sub-commercial" interest rate which compares unfavorably to the terms presented to Nakheel's lenders, according to a person familiar with the situation.
- As part of the plan, the Dubai government wants to separate Nakheel from Dubai World and take full ownership of the property developer behind Dubai's palm islands. The move, which is seen as vital to protect the local economy, requires 100 percent approval of lenders to Dubai World.
