Dubai World debt restructuring and Islamic finance in a restructuring

The details of the Dubai World proposed restructuring plan are still not fully known. However, what is known is that Dubai will fund Dubai World with $9.5 billion, of which $8 billion will be provided to Nakheel under the proposed restructuring proposal described by the media. Of this, $4 billion will be used to restart projects at Nakheel and repay the maturing sukuk with a combined principal amount of $1.75 billion. To restart projects, smaller trade creditors would receive full payment and larger trade creditors would receive 40% payment in cash with the remainder paid with a tradable security that could be held for full repayment or sold to another party. One of the concessions by Dubai's government is that it will place itself lower than other creditors in receiving a return of the funds it has injected in Dubai World of $8.9 billion by the Dubai Financial Support Fund (DFSF) and will convert this into equity. The remaining Dubai World debt holders' fate is less clear although it is believed they will be repaid in full over a lengthened 5-8 year period at lower interest rates than the debt pays currently.

While the plan faces an uncertain fate because it must be approved by creditors, it does raise a question in my mind about the different treatment of Nakheel sukuk holders. Why would Dubai provide full repayment of the 2010 and 2011 Nakheel sukuk and not other debts? There is an Islamic facility for $1.2 billion for Limitless, the international property arm of Dubai World, that matures in March 2010 that was reported to be rolled over with the maturity extended and possibly also excluded from Dubai World negotiations. One of my first reactions to the Nakheel sukuk being repaid was that perhaps their Shari'ah-compliant nature meant that rolling them over by extending the maturity would have raised too many Shari'ah-compliance issues and therefore was repaid on schedule to avoid these constraints. However, the Limitless Islamic facility is not included in the restructuring proposal details that have been released and its size relative to the Nakheel sukuk is comparable.

However, without any additional information provided, I cannot speculate on the cause of the different treatment, but it is an interesting area to explore how a sukuk could have its maturity extended. In general, creditors are supposed to provide additional time for debtors to repay outstanding debts but cannot condition this extension of time upon a fee. However, many of the commonly used structures appear to be flexible enough to extend maturities of outstanding debts. For example, in an ijara, the rental period can be extended and the purchase undertaking amended to extend the date on which the creditor can compel purchase by the debtor. This would have the effect of lengthening the maturity of the ijara agreement. In a mudaraba or musharaka, the partnership can be extended but there would probably be issues with a fixed 'anticipated profit' on the mudaraba or musharaka without incorporating the new rules on these sukuk that would put some of the principal at risk if the underlying business cannot generate sufficient profits to repay principal plus anticipated profits.

A murabaha would be more difficult because after the sale of the good with a markup is already accomplished and the cashflows are a debt and extending the maturity with additional profit payments would probably not be allowed. However, the debt could be repaid with a new murabaha (e.g. commodity murabaha or tawarruq) that would effect the same thing as extending the debt with continuing interest payments. An istisna'a contract could be extended using the same commodity murabaha or tawarruq transaction.

However, does this extend too far beyond what Shari'ah scholars would permit as Shari'ah-compliant because they are moving away from providing financing alternatives into an area where they create the extension of a debt maturing in exchange for a fee? This is more than I can even speculate on because I am not a Shari'ah scholar, but it should provide the starting point for discussion on how Islamic finance could work within a debt restructuring.