With substantial assets being restructured, talk of state capital injections and clients struggling to assess the extent of their exposure, there’s something in the recent crisis in Dubai that is eerily reminiscent of the 2008 global banking crisis.
At the end of last month, on the eve of Dubai’s longest holiday of the year, the emirate’s government announced it would be requesting a six-month debt standstill from creditors to its wholly-owned holding company Dubai World.
In addition to this, some units of the business, including Nakheel and Limitless, will be restructured.
The news sent shockwaves around global markets anxious this could spark a drop into the second V of a possible W-shaped recession.
Denton Wilde Sapte is one of a growing number of firms that have been instructed by Dubai World creditors requesting advice on their positions. The firm’s Dubai managing partner Neil Cuthbert says there was surprise locally rather than panic when the news about Dubai World broke.
“It’s been blown out of all proportion outside of the United Arab Emirates (UAE),” he says. “Everyone here knew there was a mountain of debt – a lot of investments were worth a fraction of what had been paid for. But we didn’t know how it would be resolved. There’s surprise at the way in which it’s been done and the timing, but not that radical steps needed to be taken and taken very quickly.”
To be fair, to equate the collapse of Lehman Brothers and the recent events would be something of a stretch. For a start, the sums of money involved are vastly different. Lehman held £600bn in assets when it filed for bankruptcy, Dubai World has about $26bn (£15.6bn) of debt. Plus Dubai World is still standing and much of it is in a healthy condition – particularly Emirates airline and P&O Ferries. It is assets such as these that are at the centre of the debate over how the saga will eventually be ironed out.
The expectation was that any problems suffered by Dubai would be shouldered by Abu Dhabi – the wealthier, oil-rich jurisdiction that is the centre of the UAE federal government. About 10 months ago the central government injected $10bn into Dubai through its purchase of five-year Dubai bonds. Allen & Overy and Clifford Chance were involved back then and the firms, which are now advising Dubai creditors and Dubai World respectively (see box), could be called upon by Abu Dhabi once more. The rumour doing the rounds for the last few months has been that any further bailout by the richer emirate could come with the condition that Abu Dhabi takes a controlling stake in some of Dubai’s better assets.
But some are doubtful whether this would be the case.
“It’s not necessarily in Abu Dhabi’s interest to get hold of Dubai’s assets – it could have to step up a shortfall to creditors, so it may be best to dispose of them in the open market,” states one partner.
But Vinson & Elkins UAE managing partner Lewis Jones thinks that the ramifications for the wider Gulf region will relate to a second stage of events some way down the line.
“The stage we’re at at the moment is people trying to understand the scale of the problem,” says Jones, adding that communication between creditors and the borrower needs to be established quickly. “Opportunities for other law firms will come when we start looking at asset disposal.”
It is the possibility of key assets coming on to the market that partly explains the interest generated among UK observers.
Between 2005 and 2008 Dubai went on a spending spree through investment vehicle Istithmar and its private equity house Dubai International Capital (DIC).
The bounty included Tussauds and P&O, but crucially prime real estate as well. Properties included Grand Buildings in Trafalgar Square, which Istithmar acquired in 2005 for £155m. Also, Malta-based International Hotel Investment, of which Istithmar is a major stakeholder, bought Metropole Building for £130m and 10 Whitehall Place from Crown Estate. Its portfolio also includes the Adelphi office building on the Strand and the Turnberry Golf Course. DIC also owns hotel chain Travelodge.
Offers for some of the portfolio have reportedly already been made to Deloitte, which is advising on the restructuring. Berwin Leighton Paisner real estate partner Chris de Pury thinks that “the introduction of new stock of this quality is always going to be beneficial to an extremely thin [UK] market”.
The London prime real estate maket has certainly picked up since the summer. Evidence of this can be seen by recent news that SJ Berwin client Evans Randall could sell its interest in Milton Gate – Addleshaw Goddard’s headquarters – for a considerable profit just six months after it acquired the building from UBS Asset Management (TheLawyer. com, 1 December). But unlike Milton Gate, offers on Istithmar and DIC properties would be made at distressed levels and Deloitte will want to avoid a firesale.
However, Dentons’ Cuthbert points out that the lack of administration or Chapter 11 legislation in Dubai means that decisions over how to proceed will require extensive negotiation.
“It has to be by unanimous agreement,” he says. “If one creditor breaks ranks that could scupper a creditor standstill. The hope is that you deal with the 10 or 20 biggest creditors and get them on side and then pressure the smaller ones to come on board.”
Having said that, the fact that the $3.5bn bond issued by Nakheel is due to be redeemed on 14 December means that some agreement will have to be made quickly – if not, it could provoke a default. A group that holds about a quarter of the value of the notes has turned to Ashurst partners Abradat Kamalpour, Matt McDonald and David von Saucken.
The situation is complicated by the fact that the Islamic financing provisions of the sukuk are subject to local laws and each jurisdiction interprets sharia principles differently. Some firms – including Simmons & Simmons – are advising creditors to contact the relevant sharia committee as soon as possible in order to obtain a fatwa.
As such the implications of recent events for Dubai could be as legal as they are commercial. The lack of robust rules regarding protection from creditors could lead to calls for tougher regulations. Similarly, difficulties concerned with divergences between the interpretations of differing sharia scholars could finally make the case for people to follow common sharia norms as per Accounting and Auditing Organisation for Islamic Financial Institutions standards.
The Dubai legal system is still relatively immature and both of these measures could take years to be instituted. By then Dubai might look like a very different place.