Mashreq to seek higher interest on Dubai World debt

UAE banks will prefer higher interest rates to a government guarantee under Dubai World’s $24.9 billion debt restructuring plan, Mashreqbank chief executive officer Abdul Aziz al Ghurair said.

Foreign lenders to state owned Dubai World will prefer the option that includes the government guarantee and lower interest rates, al Ghurair said in an interview to Al Arabiya TV.

Dubai World announced Sept 10 that creditors representing more than 99 percent of the value of its loans accepted the debt plan.

The loans include $14.4 billion of bank debt, of which $4.4 billion will be repaid in five years and $10 billion in eight years. The remainder is owed to the government and will be converted into equity.

Dubai World said in May that creditors were offered three options for the $10 billion loan. In the first, banks would be paid 1 percent cash interest and a so called payment in kind interest of 1.5 percent, with the interest accumulating over the life of the loan.

The option also provides a shortfall guarantee of as much as $4 billion if proceeds from Dubai World’s asset sales are insufficient to repay principal.

In the second option, banks will receive 1 percent cash interest and payment in kind interest of 2 percent in the first five years and 2.5 percent for the remaining three years. The lenders will also get a share of $1 billion of profit that Dubai World may earn from asset sales.

In the third scenario, banks were offered 1 percent cash interest plus additional interest equivalent to the difference between the Emirates interbank offered rate and the London interbank offered rate up to a ceiling of 1 percent.

Banks would also get payment in kind interest of 1.5 percent without a shortfall guarantee.

The three month Eibor today was quoted at 2.3375 and the Libor at 0.2922 percent, according to data compiled by Bloomberg.

Impairment charges for local and foreign banks from Dubai World’s debt restructuring would vary between 5 percent and 10 percent, al Ghurair said.

Mashreqbank will set aside 5 percent of the value of the loans to Dubai World to cover impairment in the third quarter, he said.