Lack of government aid seen hurting debt revamp at shipbuilding unit Drydocks World
A potential $2.2bn debt restructuring for Drydocks World, the shipbuilding arm of indebted Dubai World, is seen facing tough headwinds with the presence of hedge funds and a lack of government aid seen threatening an amicable deal.
Drydocks has set up a committee to thrash out an agreement for the restructuring of its $2.2bn debt pile. The firm missed a payment deadline for a $1.7bn three-year loan facility that it took in October 2008. It also has another five-year $500m facility on the restructuring table.
But a potential debt accord may be hampered with a large portion of the loans getting offloaded by banks to hedge funds in secondary market deals. The loans last exchanged hands at $0.49 to the dollar in September, one secondary market loans trader said.
"Some of the lending bank consortium members have sold the loans to international hedge funds ... This will make an amicable restructuring deal difficult for the company," said Suketu Sanghvi, head of structuring and investments at Essdar Capital in Dubai.
"The international hedge funds are unlike the commercial banks or regionally based fund managers. These funds do not invest for long-term relationships and are usually not concerned about reputation risks associated from dealing with distressed borrowers or their governments through litigation routes.
Bookrunners in the 15-lender syndicate were BNP Paribas, HSBC Mashreq, Standard Chartered and Lloyds TSB among others.
"We are working with all our lenders across the board and hopefully we can come up with a solution. We are in serious discussions and we are committed to completing the restructuring in a fair manner," Khamis Juma Buamim, chairman of Drydocks World, said on Sunday.
He said the restructuring could be completed as early as the first quarter of 2012.
The restructuring has dragged on for months after the company said earlier it expected to complete the deal by end of April and had agreed on headline terms with banks.
Government-related and private companies in the region have so far avoided defaults by agreeing with creditors to extend maturities - a practice labelled "extend and pretend" by some bankers.
This method has helped banks avoid billions of dollars in writedowns and enabled companies to avoid the embarrassment of a default. But with hedge funds coming into the picture, demands may get even more stringent, bankers say.
"[Hedge funds] are not interested in sipping coffee at the (Dubai International Financial Centre) and hoping for repayment six years later. They are likely to force asset sales and timely repayments," one Dubai-based banking source familiar with debt restructurings in the region said, speaking on condition of anonymity.
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One New York-based distressed debt investor, Monarch Alternative Capital LP, has sued Drydocks in a London court seeking claims of $45.5m.
"It is regrettable that this one lender decided for unclear reasons to take legal action. The company are reviewing its options and no doubt it will defend the case," Drydocks said in a statement on the case in October.
A potential default poses big challenges for Drydocks World, which is seen as a non-core asset by the Dubai government and is unlikely to receive any support.
Parent Dubai World has itself restructured $25bn in debt, pushing back repayment to between five and eight years. Drydocks World was not included in its restructuring.
When asked if the company was looking at the sale of assets for repayment, Buamim said: "We are looking into strategic profiling of different assets but this is regular business," adding there had been no specific discussions on asset sales.
He declined to give more details. Legal jurisdiction issues make it difficult for claims against Dubai government-linked entities to be enforced in the United Arab Emirates.
Drydocks, which has its major ship and rig building facilities in southeast Asian countries such as Singapore and Indonesia, hired US turnaround specialist AlixPartners to help mend its operating performance.
"It is a good strategy to clean up finances of a company even if it includes drastic measures like a default," said a source familiar with the company's restructuring. "The worst situation for a company is uncertainty. Uncertainty is really what frustrates investors most."
Dubai was hit hard by the global financial crisis, which sent property prices slumping by more than 50 percent and forced several state-owned entities to restructure their debts.
I find it interesting that new bankruptcy law has recently been announced and then this rather detailed story reaches the media.
If there are hedge funds involved and French banks like Paribas under immense pressure back home, as is indeed Lloyds TSB in the UK, then this presents a completely different global financial landscape to that of 2010.
Should litigation mount then there are two ways out, either bring in the administrators to test the new law and then sell off the assets or provide a government bailout package. Either way it allegedly damages the credit profile.
Is Drydocks World a failing non-core asset then? - I thought it was making money again, but obviously not enough.