RBS Pressures Dubai as $10 Billion Debt Talks Stall: Arab Credit

RBS Pressures Dubai as $10 Billion Debt Talks Stall
The breakdown comes as the emirate seeks to restore investor confidence after state-owned holding company Dubai World’s near default in 2009 roiled global markets. Photographer: Gabriela Maj/Bloomberg

Royal Bank of Scotland Group Plc, Commerzbank AG and Standard Bank Group Ltd may be betting Dubai will improve terms on a $10 billion debt restructuring to protect its reputation after a near default in 2009.

The banks walked away from talks with government-owned Dubai Group after 18 months without an accord, two people familiar with the situation said July 9. The banks disagreed with demands for loan maturities of 12 years, one of the people said, asking not to be identified because the negotiations aren’t public.

The breakdown comes as the emirate seeks to restore investor confidence after state-owned holding company Dubai World’s near default in 2009 roiled global markets. In April, Dubai International Capital LLC agreed to change terms on $2.5 billion of debt and Drydocks World LLC said creditors support its restructuring plans, helping cement the emirate’s recovery.

“This could be a negotiation tactic by the banks involved to get better terms from Dubai Group,” Fahd Iqbal, director of research at EFG Hermes, said in a telephone interview yesterday. “It’s unlikely that they’ll choose to pursue legal action given the lack of precedent in the United Arab Emirates.”

The cost of insuring Dubai’s debt for five years fell 5 basis points to 349 yesterday, the lowest since July 6. Still, that’s more than double the level in neighboring Abu Dhabi, which helped bail out Dubai World. They’re also the second-highest after Bahrain among nations in the six-member Gulf Cooperation Council for which the swaps are traded.

RBS Steps Down

RBS stepped down as co-chair of the coordinating committee of mostly unsecured lenders in the talks, one of the people said. Dubai World reached a deal in March 2011 with about 80 banks to delay payments on $25 billion of debt. Dubai International Capital, the owner of Travelodge Ltd., reached an accord to alter terms of $2.5 billion of liabilities in April.

Standard Bank won’t comment on the talks because of client confidentiality issues, Erik Larsen, a spokesman for the Johannesburg-based lender, said by telephone. Martin Halusa, a spokesman for Frankfurt-based Commerzbank AG, declined to comment. An RBS official who asked not to be identified because of corporate policy also declined to comment.

“We don’t believe this will escalate as Dubai managed to restructure most of its debts during the last three years and will not take the chance to change route,” said Tariq Qaqish, Dubai-based deputy head of asset management at Al Mal Capital. “This might be a negotiation tactic” by the banks, he said.

Islamic Bonds

The yield on the Dubai government’s 6.396 percent Islamic bonds due November 2014 fell one basis point to 3.5 percent at 12:20 p.m. in Dubai. The average yield on sovereign sukuk has declined four basis points in the period to 3.56 percent on July 10, according to the HSBC/Nasdaq index.

The emirate’s $82 billion economy, which relies on trade and hospitality for more than a third of gross domestic product, benefited from a 10 percent increase in visitors last year. The property market is also picking up after the 2008 crash prompted a 65 percent drop in house prices. Fourth-quarter home sales rose 67 percent from a year earlier to 2.85 billion dirhams ($776 million) according to the emirate’s Land Department.

Dubai Group appointed eight banks to represent creditors in two committees in 2011 to negotiate the terms on $6 billion of bank debt, with $4 billion owed to other investors. Paris-based Natixis SA’s Nexgen unit and Mashreqbank PSC of Dubai make up the committee of secured lenders. RBS and Emirates NBD PJSC were leading the group of partially-secured and unsecured lenders.

U.S. Property

Dubai Group invests in financial services and owns property in the U.S., according to its website. It holds stakes in companies including Dubai-based investment bank Shuaa Capital PSC, Cairo-based investment bank EFG-Hermes Holding SAE and BankMuscat SAOG in Oman.

The company proposed paying interest of 1 percent to 2.5 percent, three people familiar with the plan said in April. Secured creditors, whose loans are backed by assets, will be repaid principal in three years, according to the people. Banks that offered partially secured and unsecured loans will be returned principal in 12 years and receive additional interest at the end of the loan term, they said.

“The banks stamina continues to be tested on the refinancing terms and this deadlock may well drag on well past Ramadan starting in a couple of weeks,” Saud Masud, chief executive officer of SM Advisory Group LLC, a New York based investment firm, wrote in emailed comments. “Whether Dubai Group will finally bring in the government backstop to appease the lenders or increase the coupon as sweetener is yet to be seen.”