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Tue 30 Mar 2010 01:26 AM

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Dubai World to offer 'shortfall guarantee' on debt

If asset sales are insufficient to repay loans, gov't may cover the shortfall - sources.

Dubai World to offer 'shortfall guarantee' on debt
SHORTFALL GUARANTEE: Dubai World has offered its creditors a shortfall gaurantee as part of its repayment plan, a source said. (Getty Images)

Dubai World, the state owned holding company seeking to restructure $14.2 billion of debt, offered creditors a so-called shortfall guarantee as part of a repayment plan, a person close to the Dubai government said.

If the sale of Dubai World’s assets does not generate sufficient cash to repay loans, the government will make up the shortfall up to a certain level, said the person, who declined to be identified because the discussions are private.

The guarantee clause wasn’t outlined in Dubai World’s press statement on March 25 when the restructuring plan was announced.

Murad Ansari, a Riyadh based analyst at Egyptian investment bank EFG Hermes Holding SAE, said: “This is certainly an improved offer from the earlier one."

He added: "It provides a little more comfort to lenders that their loans will be repaid.”

Dubai World, one of the emirate’s three main state owned holding companies, and its property unit Nakheel PJSC are seeking to renegotiate terms on $24.8 billion of debt after the global credit crisis battered Dubai’s property market and hurt the ability of the emirate’s companies to raise loans.

The Dubai government and its state owned companies racked up $109.3 billion of debt, according to International Monetary Fund estimates, as the emirate sought to transform itself into a tourism, trade and financial services hub.

Dubai World asked creditors on March 25 to roll over outstanding debt into two new loans of five year and eight year maturities.

Lenders will be paid their principal in full, although the interest rate on the loans is still being negotiated with the creditor banks, Dubai World Chief Restructuring Officer Aidan Birkett said that day.

A spokesman for Dubai World declined to comment when contacted by Bloomberg News today. The Financial Times reported Dubai World’s offer of guarantees earlier today.

Dubai World’s creditors will be paid interest below the market rate in cash, although that will be supplemented by a so- called payment in kind, the person said.

The person didn’t specify the size of the payment-in kind, which creditors would receive at maturity rather than over the lifetime of the loan.

Separately, Nakheel’s creditors were asked to extend loan maturities at interest rates linked to the Emirates interbank offered rate and the London interbank offered rate.

Two of Nakheel’s Islamic bonds, which raised $1.73 billion, will be paid in full when they mature this year and in 2011.

The differing treatment of Dubai World and Nakheel’s creditors reflects the different levels of security and the legal positions of each creditor class, the person said.

Dubai World’s lenders are unsecured, while lenders to Nakheel have recourse to the company’s assets, the person said.

More than 90 banks are owed money by Dubai World, and seven of its biggest creditors including Royal Bank of Scotland Group, HSBC Holdings, Standard Chartered and Emirates NBD are negotiating with Dubai World on behalf of the lenders on the restructuring proposal.

Dubai’s government on March 25 pledged to pump $9.5 billion in new cash into Dubai World and Nakheel as part of the restructuring plan.

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