Dubai Saturday Update

The jockeying between Dubai World, Nakheel and the sukuk certificateholders has begun in earnest, following a meeting of the certificateholders amongst themselves on Friday. According to the Financial Times

"Lawyers representing holders of sukuk bonds from Nakheel, the real estate unit of Dubai World, are expected to reject any attempt by the government-owned holding company to call a standstill on its debts."
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"One bondholder said: "We are not going to give the government the luxury of a standstill that avoids default. We expect full repayment, so we are keeping the pressure as high as possible."
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"The move was made as Dubai World seeks to encourage holders of the sukuk to negotiate, placing repayment within a broader restructuring of the conglomerate and its real estate units, Nakheel and Limitless

"As the government pushes for a wholesale restructuring of Dubai World, it may inject cash into these flagging property companies if creditors are willing to compromise, according to a person close to the situation.

"Nakheel groaning under $8bn in debt, is seeking ways to recapitalise its balance sheet to match its short-term liabilities with long-term real estate development plans. The company has had to put on indefinite hold many projects as cash flow and financing dried up.

"Options could include paying out the sukuk at a certain percentage on the dollar, as well as rolling over the sukuk into new debt or possibly granting equity.

"Dubai World did not call a meeting of bondholders 21 days in advance of the December 14 maturity date, a step necessary to approve any standstill request. That raises the prospect of a default if the company does not pay the bonds before the two-week period of grace expires on December 28.

"The government is thought to believe enforcement remains a poor option for bondholders, as Nakheel's assets are located almost entirely in Dubai."

Dubai World has until December 28 to make full repayment on the sukuk to avoid a default, which would then shift the attention onto the ability of the courts in Dubai to judge any claims brought there. These courts would also likely be called upon to enforce any judgments the certificateholders receive in English (or other) courts.

This would be a large challenge to the legal system in Dubai, which is lacking in precedent for anything like the resolution of a default by a government-related entity on its debts and could be further complicated by the complex structure used to ensure the sukuk was Shari'ah-compliance. At this point, the certificateholders could be applying pressure on Dubai World in the hopes of getting better terms from Dubai World and may not necessarily be signaling that they will unequivocally reject either a standstill agreement or a haircut on their debts. However, this will not be settled probably until near the end of the grace period (December 28).

In positive news for Dubai, the FT reports that "On Friday the Dubai government confirmed that it would step in to avoid any default on bonds issued by Dubai Electricity and Water Authority, guaranteed by the government." Unlike the Nakheel sukuk, any default by DEWA would be a sovereign default because of the irrevocable guarantee of the debts, including the Thor Asset Purchase (Cayman) Ltd. notes, that has been accelerated to December 14, 2009 and downgraded to junk (BB- from A-).