Will insolvency proceedings leave Drydocks World high and dry?

Drydocks World’s move to file for insolvency protection could reinvigorate the UAE’s long-awaited bankruptcy law
Will insolvency proceedings leave Drydocks World high and dry?
DP World, the most profitable arm of the Dubai World group of companies, was ringfenced from its parent’s restructuring.
By Claire Valdini
Sun 15 Apr 2012 10:09 AM

News that state-backed Dubai World had requested to restructure $26bn of liabilities in 2009 shook the economic foundations of the once-booming emirate and sent global stock markets spiraling.

While last week’s announcement that its shipbuilding subsidiary, Drydocks World, would test a new form of insolvency protection had little to no effect on regional markets, it did mark a turning point in the emirate’s move to bring its bankruptcy laws — and attitudes towards debt — in line with global practices.

Drydocks’ filed for insolvency protection under Decree 57 of the Dubai World Tribunal in a bid to help it enforce a $2.2bn restructuring plan on a minority of resistant creditors. Parent company Dubai World said the filing was a “pragmatic and sensible decision”.

“It’s put the Drydocks in a position, with the guidance and protection of the tribunal, where they can work their way through all of the debt issues and restructure their business,” says Jonathon Davidson, managing partner at Dubai-based Davidson & Co Legal Consultants, who calls it a “very positive” move.

“The protection has perhaps even secured the jobs of the 7,000 employees at Drydocks and has ensured that the 15,000 trade creditors of Dubai Drydocks can work out a deal to get paid. It may not be all at once but there is a light at the end of the tunnel,” he adds.

Decree 57 was enacted by Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, in 2009 to deal with the debt restructuring of conglomerate Dubai World and its subsidiaries. The decree, which includes a number of well-known English and US restructuring tools, states that if at least two thirds of the creditors agree to a proposal, the tribunal has the power to make it binding on others involved in the claim.

Drydocks said that four lenders had yet to approve the plan but creditors holding around 75 percent of the debt had agreed to the deal. The firm, which is seeking to restructure one $1.7bn bank loan due in October and another $500m loan that matures next year, proposed repaying creditors in five years last month.

Drydocks World chairman Khamis Juma Buamim said the firm, which has $318m of cash reserves, wants to transfer debt from its South East Asia operations to Dubai and is seeking a joint venture partner for its Singapore operations.

“We have declared that we would like to go ahead and implement the restructuring and [because of] the minority who tried to delay the process, it is appropriate that we take immediate action,” Buamim said. “It is incumbent on me ... to declare that I will go to court to force the issue. And we did.”

Creditors, including New York-based hedge fund Monarch Alternative Capital (MAC) will now be “crammed down” or forced into accepting the restructuring proposal. Last month, MAC won a $45.5m legal case against Drydocks after it defaulted on its debts.

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“There is no negotiation required with Monarch. There is no special deal. They have to accept the deal on the table,” said Buamim.

The move will mark the first real test for the tribunal, which has so far only handled small claims. “The [Dubai World] Tribunal was set up with exactly this in mind. It was anticipated that Dubai World subsidiaries would call upon the protection but they actually didn’t… [so] it’s the first time it’s been called on to provide that protection,” says Davidson.

Drydocks hasn’t been the only firm looking for solutions to its crippling debt woes in the Gulf. Dubai International Capital, the private equity arm of Dubai Holding, last week confirmed it had sealed a deal with its creditors to restructure around $2.5bn of debt.

DIC’s news followed hot on the heels of Bahrain-based Arcapita Bank’s announcement last month that it had become the first Gulf firm to file for Chapter 11 in the US after failing to reach an agreement with creditors.

The firm - a manager of Islamic-compliant investments with $7bn under management — had been struggling to reach an agreement with creditors on a $1.1bn syndicated Sharia-complaint loan and was reportedly forced into bankruptcy by hedge funds looking to be repaid in full.

The company’s operations, which include stakes in US brand names such as Caribou Coffee, Church’s Chicken, US-based Falcon Gas Storage Co and Irish power utility Viridian Group, means it was able to file for Chapter 11, says Davidson.

“Arcapita was able… to seek Chapter 11 protection because it had sufficient links to the US with a lot of their portfolio companies based there,” he explains. “Most of Arcapita’s assets are offshore in special purpose vehicles, which would therefore allow it to pursue Chapter 11. If you have assets in various parts of the world you can seek the assistance of the courts in those countries.”

Drydocks’ move last week is likely to reinvigorate the UAE’s push to update its archaic bankruptcy laws, which were plunged into the spotlight in the wake of Dubai’s debt crisis that saw several state-backed entities forced to restructure their debt obligations.

Dubai World agreed economic terms with its lenders on $23.5bn of debt in May while state-owned developer Nakheel said in August it is restructuring AED59bn ($16.1bn) of liabilities. The developer narrowly avoided a 2009 sukuk default after Abu Dhabi stepped in with a last-minute $10bn lifeline for Dubai.

Lawyers have long complained that the current UAE bankruptcy law is outdated, particularly when it comes to criminalising debtors, which means it is rarely used. “It’s a fairly long and drawn out process and it’s largely untested,” says Davidson.

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“There isn’t a corporate restructuring process that can be used by either the company to bring its financial states to the table and get a deal agreed or by the stakeholders to bring the company to the table and get a deal agreed,” adds Ian Schneider, partner and leader of Business Restructuring Services at PricewaterhouseCoopers, Dubai, and one of three appointed nominees overseeing the Drydocks World Decree 57 process.

“Restructuring discussions in the Emirates take a long time whereas in other jurisdictions, where there is insolvency law, the discussions are shorter because there is the ability of one party or another to force the agenda,” he adds.

The UAE falls short of global standards when it comes to enforcing business laws. The Gulf state ranked 33rd overall in the 2011 World Bank Ease of Doing Business report but dropped to 134th on enforcing contracts and 151st on resolving insolvencies.

Local officials have been working on a draft of the bankruptcy law, which is likely to be completed by the end of the year. The new legislation will include several elements of Decree 57, says James Farn of Hadef & Partners, which, along with Clifford Chance, is helping to draw up the new legislation.

“Decree 57 has certain features, which you get in the new [bankruptcy] law,” he says. “The general aim of the new law is to create a more modern, debtor-friendly insolvency regime, with particular emphasis on the rescue of a debtor’s existing business or the restructuring of a debtor’s liabilities where the debtor gets into financial difficulties, rather than formal liquidation or bankruptcy,” he adds.

Under the proposed law — based on a range of best practices already used in France, Germany and the UK — the UAE will establish a new commission to help businesses with financial restructuring and introduce a streamlined bankruptcy procedure. Other changes will include a move away from court-driven insolvency procedure and encourage out-of-court settlements between debtors and creditors. Individual debtors will also be able to file for insolvency.

While the economic impact of the new law cannot yet be quantified, Schneider says the move is likely to reduce the high cost of borrowing in the Gulf state. “One of the things that the global capital markets had a rude awakening to in 2008-2009, is that there was not that degree of legislation in place,” he explains.

“The absence of that means that international lenders will view the country risk in this jurisdiction as higher and the impact of that is that it means the cost of debt will be higher. The economic benefit of putting in place a restructuring or insolvency law is it might find that global lenders are more likely to transact and any lender is more likely to transact at a lower price,” he adds.

That should spell good news for Dubai. One of the great fears for investors setting up in the UAE has been that bankruptcy has been linked to criminal, rather than civil, proceedings, which is not the case in other jurisdictions. As the emirate moves towards a more standardised structure for bankruptcy, one more barrier towards greater foreign investment can thus be removed.

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