Monday, December 07, 2009

Dubai Monday news

The creditors of the Nakheel sukuk may try and claim the land underlying the project which was valued at over $4.2 billion by Jones Lang LaSalle in 2006 based on the value of the development plan. This is pretty much the only recourse sukuk holders have if Dubai World cannot make good on the guarantee of the sukuk. Remember, the Dubai World guarantee is granted by a non-sovereign holding company and unless it decides to sell its stakes in the companies it owns, including DP World. Dubai World has announced that it may sell some assets, although it had earlier disclaimed any intention to sell assets which include a stake in Standard Chartered Bank, P&O Ports (a part of DP World, the purchase of which led to controversy because of P&O's U.S.-based port holdings which were divested), luxury retailer Barney's and Limitless.

Any claims on the underlying land would be difficult to enforce, particularly for non-UAE creditors because they may not be able to get a judgment to enforce the mortgages in courts in Dubai or register the land in their names. The sukuk prospectus (as I have described in an earlier post) provides some caution about the legal durability of the structure that was set up using a security agent:
"The Dubai Lands Department (the Governmental of Dubai's property registration authority) will register mortgages in favour of UAE licensed banks or persons. Further, the Dubai Lands Department will not register a mortgage, inter alia, if a bank mortgagee is not licensed to operate in the UAE The Security Agent is licensed to operate in the UAE. However, in the absence of clear judicial or legislative guidance or clarification on the arrangement contemplated by the Security Agency Agreement there can be no assurance of the enforceability of the Mortgages by the Security Agent in the manner contemplated by the Security Agency Agreement or any enforcement process or procedure."
"A mortgage granted over real property must be perfected by entering into a mortgage agreement, completing an application form and registering the mortgage agreement in the lands register at the Lands Department. Only the interests of a lender licensed by the central bank may be registered. As such, a non-licensed lender will be prohibited from taking the steps necessary to perfect certain security interests in real property (where registration is required). A possible (but as yet untested before the UAE Courts) way of non-UAE licensed banks or persons deriving the benefit of such mortgage could be to appoint a UAE licensed bank to act as a security agent who would act for all lenders on any enforcement of the security in the UAE."
The chances of a positive outcome through legal means, particularly for the international firms talking about pursuing this route are slim and expensive and the land they would get if they prevail is of dubious value (it is more or less empty desert with a few low structures). A lawyer speaking to the Financial Times cautioned: "It’s expensive, time-consuming and unpredictable, and any creditor thinking of taking legal action in this part of the world must understand that from the outset". Another UAE-based lawyer added, "If you are taking action against the government in the courts – good luck to you".

It is possible that the threat of legal action is nothing more than a pressure tactic, based on the negative image problems that Dubai would receive from international investors with a drawn-out legal case. The international creditors led by QVT, an activist distressed debt fund, may be hoping that the bond repayment is eventually made by asset sales of other Dubai World assets. The last week before the maturity next Monday of the Nakheel sukuk will probably feature continued back and forth statements from Dubai World and the creditors. Dubai World is currently in talks with its six largest bank creditors.

After the immediate crisis with Nakheel passes, it will be expensive for Dubai World to refinance its other debts with a across-the-board sovereign bailout having already been ruled out.

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