The recent news flow on Limitless and Dubai World highlights that the wave of restructured debt from 2015 onward is likely to be challenging for the emirate’s authorities, according to BofA Merrill Lynch Global Research. It is widely expected that Dubai will muddle through, though the current GRE refinancing strategy remains vulnerable if there are dislocations to global funding markets or shocks to growth. The backdrop of still tightening Dubai market spreads provides less attractive yield and risk-reward profile, in BofA’s view.
Debtwire reported two important news stories around Dubai Inc. upcoming refinancings last week. Limitless appears to have approached lenders with a waiver request for the first amortization payment of US$0.4bn due in December 2014 under its 2012 debt restructuring agreement of a US$1.2bn loan. The US$0.4bn amortization is the first of three equal annual tranches from December 2014 to December 2016. Limitless is currently lagging on its asset disposal plan and has offered a small debt pre-payment in exchange for the approval to push back the amortization by a further 12 months. In addition, Dubai World has requested proposals to manage US$4.4bn in loans maturing in March 2015 (which pay little interest and are not government guaranteed) and reorganize its US$10bn repayment due in March 2018 (which benefit from a shortfall guarantee of US$2.2n), amid slow progress on asset sales. The annual creditor meeting in April is likely to provide management with an opportunity to update its strategy. The news story stated that authorities were keen to avoid reputation risk ahead of the World Expo 2020.
The systemic nature, size and visibility of the Dubai World debt maturities are likely to prove a litmus test for the Emirate, in BofA’s view. If Dubai successfully negotiates this delicate first turn in 2015 against the backdrop of an improved domestic economy and a more liquid banking sector, there might be a room for sovereign z-spreads to compress further. However, in most of the credit risk re-pricing already occurred. To grow out of its debt overhang, Dubai needs a combination of internal cash generation, asset sales, refinancing, decent global outlook and liquidity, as well as potential Abu Dhabi support.
Dubai’s strategy likely is to: 1) continue to keep bondholders whole, given the need of healthy GREs to access international debt markets; 2) increase and upstream leverage at performing entities; 3) progress on non-strategic international asset sales, to the extent reasonable valuations can be achieved; 4) possibly hesitate on sales of non-controlling stakes in domestic “crown jewel” assets, which may be partially sold to strategic Dubai or Abu Dhabi entities; and, 5) pursue a (possibly partial) repayment of near-term maturities to boost domestic confidence and increase likelihood of refinancing any near-term shortfall (particularly the domestically owned portion) and renegotiating the longer-term maturities toward a more phased out schedule, in our view.
The servicing of restructured Dubai World debt is largely predicated on asset sales, given limited dividend income. Initial disposal valuation assumptions on international assets may have been on the aggressive side. Indeed, a number of setbacks were recorded with international assets being seized by creditors. Based on publicly disclosed information, BofA’s tally of Dubai World assets suggests that 1) recent asset disposals net proceeds (a portion of which already filtered as pre-payment to creditors) remain insufficient; 2) selling the 50% stake in CityCenter and 5.3% stake in MGM resorts appears essential and broadly sufficient to meet the bulk of the 2015 debt; and, 3) the 2018 debt repayment appears unlikely to be met except through selling strategic assets such as DP World and JAFZA. If non-controlling stakes are ceded, Dubai World could combine fully repaying international lenders, with squeezing domestic banks into refinancing their exposure at more commercial rates, along with, as a last resort, activating the sovereign guarantee for any shortfall, in our view.
