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From The Times

January 14, 2010

Dubai World tries to keep banks at bay with six-month standstill on its debts

Hugh Tomlinson in Dubai

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A lavish ceremony marked the opening of the Burj Khalifa tower, Dubai - the world's tallest skyscraper - despite the collapse of the emirate's real estate market last year

Dubai World is ready to propose a formal six-month standstill agreement on $22 billion (£13.5 billion) of debts by the end of the month.

The proposal will mark the next stage in the restructuring of the government-owned conglomerate since it sent shockwaves through international markets last November with the admission that it was unable to meet its obligations.

Under the terms of the standstill agreement, Dubai World will undertake to service its debts, while the banks will agree not to try to seize its assets through the courts. If the proposal is accepted by the banks, the two sides will begin talks on a complex restructuring of the group to repay its debts through extending the maturity of outstanding loans and by selling assets.

Dubai World met representatives of more than 90 banks on December 21 to discuss the outline of a standstill agreement. The talks have continued on a near-daily basis with a committee of leading creditors.

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The committee is formed of six banks, including HSBC, Lloyds Banking Group, Standard Chartered and Royal Bank of Scotland, as well as Emirates NBD and Abu Dhabi Commercial Bank. KPMG, the accounting firm, is acting as adviser to the committee. Allen & Overy is providing legal counsel.

Dubai World appointed Deloitte in November to restructure the business. Rothschild, Moelis & Co and Clifford Chance are also working as advisers.

Dubai World declined to comment on the talks yesterday but insiders close to the group made clear that the standstill proposal was imminent.

Getting the consent of such a large group of lenders is the next stumbling block. The leading banks, and others with long-term interests in Dubai and the Gulf region, are keen to accept the standstill, but other institutions are pressing for immediate repayment.

It is understood that the committee is struggling to bring smaller lenders into line, despite a broad acknowledgment that fast repayment is unrealistic, given the depth of Dubai World’s financial difficulties. Many of the group’s property assets are almost worthless after the collapse last year of Dubai’s real estate and construction markets. Trophy assets such as Barneys, the American luxury retail chain, and the QE2 cruise liner are likely to be sold.

Ultimately, both sides need Dubai’s economy to recover. With the Dubai Government and its related businesses more than $80 billion in debt, confidence in the state and its business model remains fragile. However, it is believed that working with Abu Dhabi more closely in future provides the best chance for Dubai to salvage its reputation. Only a $10 billion bailout last month from Dubai’s oil-rich neighbour prevented default on a $4 billion bond by Nakheel, the developer behind many of the emirate’s extravagant property projects.

In total, Abu Dhabi and the United Arab Emirates Government loaned Dubai $25 billion last year. The last $10 billion is contingent on Dubai World reaching the standstill agreement with its creditors.