Dubai will spend up to $9.5 billion restructuring its debt-laden Dubai World conglomerate in a plan to give bank lenders their money back in five to eight years and repay two key bonds.
The proposal would give creditors new debt covering the $14.2 billion they are owed, and repay in full Dubai World unit Nakheel's 2010 and 2011 bonds.
The news drove Dubai's stock exchange <.DFMGI> to an 11-week high and sent the price of developer Nakheel's bonds soaring.
The plan calls for no new funds from Abu Dhabi, Dubai's wealthier neighbor, which bailed out the emirate last year.
But Dubai will get access to the $5.7 billion remaining from Abu Dhabi's earlier $10 billion lifeline and pay for the rest of the cash injection itself.
Dubai said on Thursday it will pour $8 billion into Nakheel, with a $1.2 billion debt-for-equity swap also part of a move to take the property developer off Dubai World's hands and place it with the government directly.
It will also pump $1.5 billion into Dubai World as part of a recapitalization that would include an $8.9 billion debt-for-equity swap.
The emirate, home to an indoor ski slope and favored by expatriates for its glitzy lifestyle, struggled to cope when the economic boom in the region, driven by record high oil prices and easy credit, came to an abrupt end in 2008.
Initial feedback on the proposal, which must now be approved by the conglomerate's 97 creditors, was positive.
The fact that we are still talking only of extension (of loan repayments) rather than a haircut is highly positive, said Luis Costa, director for emerging markets debt strategy at Citigroup in London.
Robert McKinnon, chief investment officer at Asas Capital, said: This is probably the best outcome that could have come out, but some of the details are vague. It says Nakheel will renegotiate at commercial rates, but without a guarantee from Dubai World or the government, these commercial rates would be pretty high.
WHERE'S THE DETAIL?
Basic questions dog the plan, such as how cash-strapped Dubai will raise the $3.8 billion needed to fund its plan. And then there is the rate of interest on bonds to repay creditors.
The plan is lacking in detail and there is still some uncertainty, Ahmet Akarli, a Goldman Sachs analyst said in a note. It is not exactly clear, for instance, how the Dubai government will fund its direct contribution to the restructuring operations.
Dubai said the money would come from internal government resources and its financial obligation was spread over several years. It may raise funds through asset sales but officials said there was no pressure for a fire sale of assets.
Assets inevitably will be disposed of at the right time, at the right value, at our choosing, Aidan Birkett, Dubai World's chief restructuring officer, told reporters.
A final deal with Dubai World's 97 creditors is expected to take months.
Dubai World, one of three holding companies controlled by Dubai, shocked world markets in November when saying it needed to delay repaying $26 billion debt.
On Thursday, the owner of the QE2 liner and a stake in Cirque du Soleil put a price tag on the total amount of debt held by banks at $14.2 billion at the end of December.
The government said those creditors would receive 100 percent principle repayment via new debt with five and eight-year maturities. There was no detail on the interest rate.
I'm not at liberty to say what that coupon is going to be, but that will be a market coupon which will allow that instrument to be worth full value over time, Birkett said.
The Nakheel bond payback offer came as a surprise, as does the absence of a more visible role by wealthy neighbor Abu Dhabi, which had come to the rescue with $10 billion aid late last year. That lifeline helped Dubai avert an embarrassing default in December on a $4.1 billion bond issued by Nakheel.
The UAE central bank took up $10 billion of Dubai debt in February 2009 in a sovereign bond by the Dubai government.
Bank creditors will be asked to restructure their debt at commercial rates, the government said. Trade creditors would be offered a significant cash payment and a tradeable security, expected to be some type of note or bond.
Core creditors met on Wednesday to finalize months of talks on how Dubai World can restructure its debt, about a quarter of Dubai's estimated total debt of $101 billion.
Dubai World is negotiating with a seven-member committee representing the 97 creditors.
The panel is made up of Standard Chartered
(Additional reporting by Dinesh Nair, Nicolas Parasie, Luke Pachymuthu, Rania Oteify, Martin Dokoupil, Amena Bakr, Raissa Kasolowsky, Carolyn Cohn, Sujata Rao, Rachna Uppal; Writing by Amran Abocar and Thomas Atkins; Editing by Dan Lalor and Will Waterman)