Dubai World debt plan may have downside

DUBAI: Dubai World's debt-restructuring plan may be "negative" for its bank creditors because repayments will be funded by asset sales and dividends, JPMorgan Chase & Co said.

Dubai World, a state-owned holding company, is asking creditors to wait as long as eight years before they receive all their money back as part of its US$23.5 billion (US$1 = RM3.31) debt reorganisation announced last week.

"There is no mention of a government repayment guarantee for Dubai World's bank creditors," Zafar Nazim, a London-based analyst at the bank, wrote in a report dated March 25. "The government intends to inject only US$1.5 billion of cash into Dubai World to support its creditors and working capital commitments. In essence, Dubai World's creditors will be relying upon assets sales and dividends."

Creditors to Dubai World's real-estate arm, Nakheel PJSC, will be asked to restructure their loans at commercial rates, and trade creditors will be offered a cash payment and a tradable security. The company's Islamic bonds, or sukuk, due in 2010 and 2011 will be paid on maturity if the proposal receives enough support from creditors.



Dubai's benchmark index surged 4.3 per cent on March 25, the most since December 14, after the plan was announced, while Nakheel's US$750 million Islamic bond maturing in January gained 48 per cent to 96 cents on the dollar, according to prices on Bloomberg.

"We would be cautious on indiscriminately extending the potential positive outcome for Nakheel bonds to other Dubai Inc entities," the report said. "The government has not explicitly ruled out restructuring other Dubai Inc entities, and continues to distinguish between sovereign and non-sovereign obligations."

Dubai, the second biggest of seven states that make up the United Arab Emirates, and its state-owned companies ran up US$80 billion in debt through the end of 2008 to transform the sheikhdom into a tourism, trade and financial hub. The International Monetary Fund estimates Dubai has outstanding loans of US$109.3 billion. The global credit crunch in late 2008 hampered Dubai-based companies' ability to raise loans, prompting a 50 percent plunge in property prices.

JPMorgan upgraded its recommendations to "overweight" from "neutral" for Nakheel's 2011 bonds. The bank initiated its coverage for Jebel Ali Free Zone, an industrial park owned by Dubai World, with a "sell" recommendation on its 2012 sukuk. - Bloomberg