For Dubai World’s creditors, indignity piles upon indignity. News that the troubled state-controlled conglomerate plans to repay its lenders a meager 60 cents for every U.S. dollar they are owed is yet another blow for lenders who until four months ago assumed Dubai World’s debts came with an implicit sovereign guarantee.
Dubai World is seeking to reschedule $22 billion of debt. But while the banks may be furious, they have such a weak negotiating hand that they may have to settle for little more than what’s on the table. True, the offer doesn’t look too bad at first glance. But the banks will only receive payment after seven years and will get no interim coupon—a much bigger ‘haircut’ than they had expected. An alternative offer—that creditors receive payment in full after seven years but receive no government guarantee and accept 40% in the form of assets in Dubai World’s most troubled business unit Nakheel—is no alternative at all, given the near-impossibility of valuing Nakheel’s island developments.