In a research note to clients, J.P. Morgan analyst Zafar Nazim said the steep discount from face value was due to the below-market cash interest of 1 to 2 percent proposed by Dubai World on two tranches of debt.
While a discount on the value of the loans will hardly be welcomed by banks, given the prolonged restructuring process, many banks are willing to accept the terms of the deal in order to put the Dubai World saga behind them.
The Dubai World proposal offers repayment over five or eight years and allows lenders additional options, depending on whether they are local or foreign lenders and on the currency of their loans.
The proposal has two tranches covering the $14.4 billion owed to the bank lenders. The first tranche, for $4.4 billion, offers a five-year maturity and 1 percent cash interest but no additional lump sum payment on maturity - referred to as a payment in kind (PIK) - and no shortfall guarantee.
Nazim said the short-dated tranche would likely trade at a significant premium to the 8-year tranche of debt due to the larger number of variables and unknowns affecting the longer maturity.
The second tranche covers $10 billion, comes with an eight-year maturity, offers 1 percent interest, and varying PIK rates and shortfall guarantees depending on the options lenders choose.
The PIK rates range from 1.5 percent up to 2.5 percent in certain years of the maturity.
Nazim said that principle recovery for this second tranche is dependent on the proceeds realized from Dubai World's ownership of DP World and Istithmar as well as the recovery of the real estate market in Dubai over the next 8 years.
J.P. Morgan believes that there is an increased probability that Dubai World will seek a voluntary restructuring with the special tribunal to ensure 100 percent acceptance of its restructuring proposal.
In May, Dubai World said it reached a deal with seven core creditor banks, which hold 60 percent of the exposure to Dubai World's debt woes. The company needs 66.67 percent of the value of any class of claim to approve any restructuring.
"Assuming the company is able to garner approval of an additional 6.67 percent (by value) of creditors, the DIFC bankruptcy court can force the entire class of unsecured creditors accept these terms," Nazim said in the note.
Dubai World's announcement in November that it could not meet its debt obligations shocked global markets and sparked fears about the glitzy emirate's ability to refinance its considerable debt burden. Ninety-seven banks make up the company's syndicate lenders.
