Company says it is working hard towards consensual agreement with banks
Dubai Group, part of a conglomerate owned by the emirate's ruler, has not paid interest on $10bn of debts for more than a year, threatening the profits of Middle Eastern banks, sources involved in the company's restructuring say.
When it announced it needed to renegotiate its debts last year, Dubai Group, part of Dubai Holding, the personal investment arm of Sheikh Mohammed bin Rashid Al Maktoum, said it would continue to service them.
But the company has not paid "hundreds of millions of dollars" in interest since August 2010, one of the sources told Reuters this week.
Dubai Group is working hard towards a consensual agreement with banks and expects to provide further details in the coming months, a spokeswoman said, confirming that interest was being rolled up with the principal.
"Facilities are being defacto rolled over throughout restructuring negotiations so that a consensual agreement can be reached to the benefit of all stakeholders," she added.
But without a solution before year-end, the 44-member bank group, consisting mostly of lenders based in the Gulf and Egypt, according to sources, will have to fully provision for the amounts owed, which will significantly hurt future profits.
Dubai's largest bank Emirates NBD would be hit hardest. This could also undermine faith in Dubai's recovery after the emirate's debt crisis, which was caused by Dubai World, another government-related entity.
Dubai World completed its own $25bn restructuring in March, having shocked the world in November 2009 by revealing that it was struggling to repay its debts.
In contrast with Dubai World, which got $9.3bn of new capital from the Dubai authorities to assist its restructuring, bankers say they are surprised no help has been offered to Dubai Group from either the government or its parent company.
"For many of the boards of banks in the Arab world, they just see the ruler of Dubai and that is the end of the story," a second source said. "They just can't see why he wouldn't support his personal investment vehicle."
For now agreement looks hard to achieve.
"The banks need to agree what they are doing but will only do that once they know how big the pot is. However, Dubai Group has said it won't discuss anything without bank agreement," said the first source.
The two sources said there was no formal standstill on the interest payments, with the company just halting payments and leaving the banks with the only option of trying to add due interest to the overall settlement.
Of the $10bn debt, $6bn is due to bank creditors, split between a secured and an unsecured grouping, with the remaining $4bn classed as inter-company debt, such as loans from key shareholders.
Unlike Western restructurings, inter-company debt in Dubai takes precedence over banks, putting them under more pressure.
Talks over the last year at bank level have made some progress, according to those close to the negotiations, but a conclusion is not in sight.
The situation is further complicated by splits among the creditors. With two separate lender groupings, the banks have been jostling for position to ensure their claims are protected as much as possible, with one secured creditor said to have been holding out, according to the second source.
He said that while secured lenders have some collateral pledged against their debt, the unsecured want to keep any other assets free so they can attempt to claim them should the company be broken up.
"Under insolvency rules, the secured positions are valued and that is given priority, with the rest of the assets tipped into a pot which the unsecured get. This hadn't been accepted by one particular creditor but they have now seen the light."
This complex inter-creditor negotiation is why progress has been slow. In the Dubai World restructuring, there were more banks involved but everyone had the same position - meaning all energies were concentrated on the talks with the company, instead of how each of the banks should be treated.
The situation is also complicated by the fact Dubai Group has many strands and its assets are concentrated in financial services, producing very little cashflow, making viable exits to raise funds extremely tricky at the present time.
At current market prices, Dubai Group's assets could be worth as little as $2.5-3bn, the first source said.
Therefore, any solution is likely to involve a long debt extension to allow for asset valuations to recuperate.
The first source said something similar to Dubai World's agreement - which saw new five and eight-year loans put in place - was possible, with tenors stretching as long as ten years.
The new loans would be structured with bullet repayments - meaning the main amount would not be due until the end of the term - and interest rates would also be low so as not to burden the group's cashflow with interest payments, the source added.
Time is running out for a deal before banks will have to book full provisions on the debt, based on market values.
"The banks' provisioning deadline is December 31, which is immovable," the second source said.
Last month, Hussain al Qemzi, the chief executive of Noor Islamic Bank, one of Dubai Group's creditors, said he hoped a deal could be reached by year-end.
If the banks are forced to provision, it is expected to complicate negotiations.
"People could become more aggressive as they have nothing to lose. When they've already said the stake is worth nothing, it becomes about what the banks can get so there is the potential for more to hold out for a better deal for themselves," a restructuring source said.
Meanwhile, full provisioning would also significantly hit the full-year numbers of the banks involved.
ENBD is a co-chair of the unsecured tranche - along with Royal Bank of Scotland - a role which traditionally means they have some of the largest exposures.
Mashreq Bank and Natixis SA's Nexgen unit are co-chairs of the secured tranche.
ENBD warned last week that provisioning was likely to impact its fourth-quarter results. What could make matters worse for ENBD is its recent takeover of Dubai Bank, an Islamic bank which was 70 percent owned by Dubai Group until it was nationalised in May by the Dubai government.
According to its 2009 results, the last available accounts, Dubai Bank had AED4.1bn of exposure to parent entities - equivalent to 23.6 percent of its loan book and nearly 20 percent of Dubai Group's $6bn of bank debt.
"ENBD expects no impact on its non-perfoming loans or profit and loss as a result of the Dubai Bank acquisition," its spokesman said.
"We don't know the exact details on Dubai Bank but, usually, a bank won't move a loan to the NPL column unless it has been restructured so if the debt is currently not classed as NPL then ENBD will have to take that provision," said Ankur Shah, director of equity research at Arqaam Capital.
"They have said there will be no losses from Dubai Bank's NPL. This is the existing book of loans though so if they have new impairments on the book then ENBD will have to provision."
If provisioning is required, the same 20 percent impairment taken on Dubai Holding debt in the last quarter would equate to around AED820m for the Dubai Bank exposure alone, before ENBD takes account of its own Dubai Group debt.