Rocky path seen ahead for Gulf debt restructurings

Increased risk of defaults as banks become less willing to extend maturities
Rocky path seen ahead for Gulf debt restructurings
State-owned Dubai World has restructured $25bn of debt, but may yet sell off prized assets such as DP World
By Reuters
Thu 20 Oct 2011 08:43 AM

Two years after the Dubai debt crisis erupted, contributing
to a wave of loan restructurings across the Gulf, those restructurings may be
entering a more difficult phase as banks become reluctant to extend maturities
further.

Government-related and private companies in the region have
so far avoided defaults by agreeing with creditors to push out maturities - a
process labelled "extend and pretend" by some cynical bankers.

This method has helped banks avoid billions of dollars in
writedowns and companies to avoid the shame of defaulting. But some banks may
now be reaching the limits of their willingness to accept this strategy.

Instead, they may demand that debtors make payments while
the banks write down part of the debt, or resort to more radical strategies
such as debt-for-equity swaps.

"In recent months, we have started to see the end of
the first phase of restructurings where refinancings were largely based on
extending and pretending," said David Stark, managing director for
restructuring advisory services at consultants Deloitte, which has advised on
debt restructurings in Dubai.

"We are beginning to see situations where the hoped-for
market recovery has not materialised and, as a consequence, more radical
restructuring may be required."

The most prominent example of maturity extension is the
$25bn restructuring of state-owned conglomerate Dubai World, which promised
full repayment plus interest to 80 creditors in exchange for their agreement on
new five- and eight-year financing facilities.

The jury is still out on the success of Dubai World's
restructuring. Its plan says there will be asset sales, which could include
prized assets such as ports operator DP World, but Dubai has clearly been
reluctant to sell off its crown jewels.

Some other debt restructuring plans in the region have
clearly run into trouble, because they were based on excessive hopes for
economic recovery and rebounds in asset prices - the main Dubai stock market
index is languishing slightly below the low it hit in 2009.

Kuwait's Global Investment House is an example. Last month
the investment firm asked banks to defer debt payments set down under the
$1.7bn restructuring accord which it signed in 2009, and it appointed Evercore
Partners to advise it on putting together a new debt plan.

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It is not yet clear how Global Investment's new deal will
work. But a simple extension of maturities may be difficult. One reason is that
the euro zone debt crisis has increased pressure on the funding of European
banks, some of which are no longer as happy to see their money tied up for long
periods.

"We are seeing a toughening stance from European banks,
but this is as much due to a recognition that problems in companies here won't
be resolved by a short term bounce-back of asset values, and more significant
changes need to be made, as it is by the European situation," Stark said.

An international banker, speaking on condition of anonymity
because of the sensitivity of the issue, said many banks remained reluctant to
write down debts in the Gulf.

"You would not believe some of the things I see and
hear as the local banks discuss how to deal with their auditors and the central
bank to avoid provisions," he said.

But banks in the Gulf have been building their capital positions
since 2009; United Arab Emirates central bank figures, for example, show
average capital adequacy ratios at the country's banks rose from 19.2 percent
in December 2009 to 21 percent in June this year. So many lenders are now in a
better position to accept write-downs.

"Write-downs will still be avoided if possible this
year but as many big regional players are expected to be overcapitalised into
2012/13, bank managements may take the opportunity to take hits they could not
afford in 2009 and 2010," said Paul Reynolds, a managing director in debt
and equity advisory services at financial consultants Rothschild.

Debt-equity swaps also remain rare, but an KD1bn ($3.6bn)
deal in February this year to restructure the debt of Kuwait's Investment Dar,
owner of half of luxury carmaker Aston Martin, may be a model for others.

The plan includes giving creditors a 10 percent stake in
Investment Dar. However, such deals will only be options for businesses with
good enough cashflows to attract banks.

Relations with governments will play a role in banks'
decisions on restructurings. Some European and local banks do not want to
jeopardise business ties to governments by being too aggressive with
state-linked firms - especially, in the case of the European banks, since the
sums involved are often minor compared to the billions of euros at stake in the
euro zone.

Big state-linked firms have also been able to adopt a
"take it or leave it" approach to banks because of their size and, in
the case of Dubai World, the use of Decree 57, a bankruptcy law that was
introduced by the Dubai authorities to deal with the restructuring of the
conglomerate. The lack of precedents for the decree meant banks were reluctant
to test it, making them more inclined to a consensual approach.

But most of the restructurings now being discussed in the
Gulf are of private companies, which do not have such advantages; Decree 57
does not cover them. This leaves them open to tougher terms from the banks.

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