Sunday, December 20, 2009

Dubai World restructuring talks to begin on Monday

The first talks in the Dubai World restructuring will occur on Monday with 90 banks and other creditors sitting down with representatives of Dubai World including its chief restructuring officer Aiden Birkett. According to reporting from Bloomberg, it is unlikely that Dubai World will present a formal standstill request and proposal at this meeting due to the complexity of the restructuring. As The National reports in an article, the restructuring process is likely to take a long time and be expensive to all parties involved.

From the perspective of the Islamic finance industry, the most interesting aspects of the restructuring negotiations--the impact of the Shari'ah-compliance of any restructuring of the sukuk owed by Nakheel and the bank debt owed by Limitless--is unlikely to be discussed immediately. The sukuk are governed by English law, which has in the past dismissed requests for Shari'ah-compliance concerns to be used to challenge enforcement actions by debtors. However, given the attention placed on Islamic finance due to the Nakheel sukuk repayment and the entire Dubai World debt crisis, it will be imperative that this issue be addressed publicly. On the one hand, it will likely be impossible for Dubai World to treat creditors through conventional debt differently from those who invested in sukuk. On the other hand, there could be fallout from any restructuring that is not accepted as Shari'ah-compliant by the Shari'ah boards of any Islamic banks or other Shari'ah-sensitive investors.

This could hurt those institutions relative to conventional financial institutions that invested in the same sukuk. If the restructuring that is approved by the creditors committee were viewed as non-Shari'ah-compliant, it could force Islamic banks holding the sukuk to liquidate their holdings, which would probably be done at a price less than they would get if they held them until a complete resolution of the sukuk. This could create a transmission mechanism for the problems of Dubai World to affect unrelated Islamic banks through the losses they recognize on selling the sukuk holdings. It will indeed be interesting to watch as the negotiations continue and see the impact of some debt being Shari'ah-compliant.

Other News

  • Singapore will see its first listed Shari'ah-compliant REIT in the second half of 2010.
  • With all the negative attention in the news about Dubai, I found it very interesting to see a travel article about the rest of the UAE that was published by the Guardian.
  • Gulf Finance House appointed a new deputy CEO for investment banking, Ted Petty. The new group CEO was formerly an Executive Director at Macquarie Capital. Marquarie recently purchased a $100 million convertible murabaha from Gulf Finance House.
  • Iran is issuing sovereign, euro-denominated Islamic bonds and the "government of Iran guarantees the bonds' interest". Not to be a bit flippant about it, but it is not a typical practice to describe the periodic payments on Islamic bonds as 'interest'.
  • An article on Islamic finance provides a brief overview with all of the misstatements that have been common in much of the reporting on Islamic finance. The article describes that Islamic finance does not allow leveraged investments. In reality, there are many ways for leverage to be used within Islamic finance either through the natural leverage that accompanies Islamic banks' use of debt financing through sukuk and increasing the size of their balance sheet through customer deposits (which provides leverage over the banks' capital). There is also frequent use of leverage in real estate development where equity investments are made into a development company that builds a property with additional Shari'ah-compliant debt financing but separates the equity and debt components through a lease.

    The article also provides a description of the prohibition of riba: "Following the Quranic verse: 'Allah made legal commerce, and illegal interest,' Islamic law prohibits usury, known as riba." This description, while common in many articles about Islamic finance, does a poor job of explaining the implications of the prohibition. I have read countless articles that provide a similarly unhelpful overview, so I do not want to place too much of this criticism on this specific article. However, it does perpetuate a misunderstanding that Islamic finance is solely concerned with 'interest-free' financing, without explaining how Islamic finance actually works in practice. Perhaps it is too much to expect that a short, introductory article could provide the nuances and actual workings of the industry.

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