Dubai Group, a struggling unit of the ruler of Dubai's personal investment firm, has settled with banks who brought legal action against it to secure repayment of their share of $10bn of debt, raising hopes a wider restructuring can now go ahead.
Royal Bank of Scotland, Commerzbank and South Africa's Standard Bank, later joined by Egypt's Commercial International Bank, began court moves in September after nearly two years of talks on reorganising the company's obligations failed to yield an agreement.
Under terms presented to the banks in December, Dubai Group's parent Dubai Holding - the investment arm of Sheikh Mohammed bin Rashid al-Maktoum - will buy out their debt plus that of any others in the same syndicate of lenders wishing to exit early for 18.5 cents in the dollar, said two sources with direct knowledge of the agreement.
The deal is conditional on all lenders in the group which lent Dubai Group a $1.5bn sharia-compliant loan facility in 2008 agreeing either to sign up to the wider restructuring or exit now.
Dubai Group was hit hard by the global financial crisis in 2008 due to excessive use of leverage in its investments and a sharp decline in asset values.
After missing interest payments on two loan facilities in 2010 it spent years trying to persuade its lenders to extend repayment deadlines so that its asset values could have time to recover before it was forced to sell them to pay back debts.
The Dubai government walked away from negotiations in January 2012, dashing hopes of state-backed aid.
With the threat of legal action out of the way, a conclusion to Dubai Group's longstanding restructuring is expected in the coming weeks, with final documentation set to be sent to lenders next week, a third banking source said.
"Everyone needed to see Dubai Group get close to a deal with other creditors before this final piece of the jigsaw was tackled," the third source said.
Dubai Group declined to comment.
Under the terms of Dubai Group's wider restructuring, creditors are being asked to extend their obligations for between 3.5 and 12 years, depending on the assets secured against their exposure, to allow Dubai Group's assets to recover in value before divestment.
The settlement could embolden other creditors seeking concessions in future restructurings. The lawsuit was a first and marked a major change in the way lenders have dealt with Dubai sovereign-linked debt.
Of Dubai Group's $10bn total debt, $6bn is owed to banks and the remaining $4bn is classed as inter-company loans.
Dubai Holding, which has rescheduled some of its own debt - a $555m facility in 2010 - and seen obligations restructured at its Dubai International Capital arm, has been showing an improved financial picture in recent months thanks to land sales and a reduction in contractor obligations, a JP Morgan note published January 8 said.