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Fri 16 Apr 2010 08:04 AM

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Dubai World creditors reject 1% interest - sources

Nakheel's $980m sukuk maturing in May could be repaid without final agreement.

Dubai World creditors reject 1% interest - sources
DUBAI DEBTS: In March, the Dubai government said it would spend up to $9.5 billion on the restructuring. (Getty Images)

Dubai World offered creditors a 1 percent interest rate on two new tranches of debt as part of its restructuring plan, but they rejected it as too low, two sources close to the discussions told Reuters.

A spokesman for Dubai World declined to comment.

Dubai put the restructuring plan to creditors last month, having asked for a delay in repayment of the state-owned conglomerate's debt in November, and said the deal was conditional upon agreement with the creditors.

The proposal would give bank creditors new debt covering the $14.2 billion they are owed over five to eight years, and repay in full property unit Nakheel's 2010 and 2011 bonds.

The sources told Reuters that Dubai World's 1 percent rate offer on the new debt was rejected by creditors, who countered the offer with one at market rate, which they estimated to be around 5 percent.

"That's obviously too wide a divide, so negotiations are continuing," a person familiar with the ongoing negotiations told Reuters.

"All elements of the proposal are conditional on sufficient support," a spokeswoman for the Dubai government said on Thursday.

"Negotiations are progressing well, and we continue to expect them to do so. If they do, and we feel we're moving forward constructively, then that would be viewed as sufficient support."

The next Dubai World-linked debt falling due is Nakheel's $980 million Islamic bond, or sukuk, which matures on May 13. Bondholders might yet be repaid on time, even without a final agreement between the company and its bank lenders.

In March, the Dubai government said it would spend up to $9.5 billion on the restructuring, and the banks would get a commercial rate on the new debt, but it did not say what the rate would be.

If banks agree to roll over loan repayments for five or eight years below market interest rates, they will have to adjust the valuation of their loan to reflect current market values, effectively taking an immediate hit to profit.

One of the sources said negotiations between the company and bank creditors were progressing slowly and there was some discontent over the full and timely repayment being offered to Nakheel's bondholders under the deal.

Creditors met earlier this week, but no concrete decisions were made, the sources said.

The Dubai government will pump in $3.8 billion from "internal government resources", expected to be partly funded by asset sales, with any shortfall guaranteed by the government.

"Between asset realisation and shortfall guarantee provided by the government, lenders will recover their principal," a Dubai government spokeswoman said earlier this month, adding that the size of the guarantee was not disclosed.

The banks' committee is made up of HSBC, Standard Chartered, Royal Bank of Scotland, Lloyds, as well as two UAE banks, Emirates NBD and Abu Dhabi Commercial Bank.

A seventh lender, Bank of Tokyo-Mitsubishi, a unit of Mitsubishi UFJ Financial Group, joined the panel this year. (Reuters)

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